China Pushes for a New ‘Global Currency’

In Financials, Politics on April 5, 2009 at 12:50

global-currencySeeing Obama’s persistent efforts to rescue the American economy with massive stimulus packages, Chinese officials get increasingly worried the value of the dollar will depreciate further and who could blame them when they hold the world’s largest currency reserves of $2 tn, rendering them the biggest holder of dollar assets. This is why Chinese Central Bank governor, Zhou Xiaochuan, has called for the creation of a new ‘Global Currency’ run by the IMF to replace the dollar as the worlds dominant reserve currency, arguing dollars risky instability-volatility.

China has been employing its humongous dollar-based currency reserves to manipulate its exchange rate vis-a-vis the dollar in an attempt to keep the yuan low to make its exports more attractive to the American market, something that has disturbed Washington. This policy reflects to the so called managed-floating exchange rate with the Chinese officially denying its implementation.

So, with the Chinese owning $2tn in currency reserves, they are extremely insecure about dollar fluctuations. They want this new global currency called Special Drawing Right (SDR), created by the IMF in 1969, to replace the dollar as  a reserve currency. The truth is that China has driven itself into a currency trap; buying the dollar, to devalue their currency, left them with these trillions in dollar reserves but now they can’t seem to get rid of it. It was a wrong policy at first place. Did they really need these double digit growth numbers? Wouldn’t China have been better off had it sacrificed some growth for less dependence on the dollar? And who forced them to buy the dollar and not the euro or the yen? They drove themselves to this trap, so why blame the US for an unstable currency when they where supposed to be prepared for the consequences of their actions. This is China’s mess that does not require a global solution (i.e. global currency). Chinese officials should have seen this coming. SDRs would only bail-out Chinese, not the world.


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