China attacks the dollar's reserve-currency status


China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.

Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.


For decades, the dollar has been a convenient medium of exchange for everyone from a central bank seeking to buy U.S. Treasury bonds to a business exporting commodities from Latin America to Asia.

To jump-start a new global reserve currency, economists say, would require someone effectively subsidizing the cost of bringing buyers and sellers together for the time it takes the currency to gain traction.

Large, deep, and highly traded markets involving a particular currency “don’t spring up spontaneously just because the Chinese central bank governor suggests this would be a good idea,” says Barry Eichengreen, an economist at the University of California at Berkeley…

In his essay, China’s Mr. Zhou proposed expanding the role of “Special Drawing Rights,” or SDRs… The SDR is “basically the Esperanto, at best, of international currencies,” says Jeffrey Frankel, an economist at Harvard University, referring to the ill-fated attempt to create a common language. “It’s not at all used.”

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