China calls for ditching dollar as reserve currency

Agence France-Presse

People's Bank of China Governor Zhou Xiaochuan said he wants to replace the dollar, installed as the reserve currency after World War II, with a different standard run by the International Monetary Fund, or IMF.

China, the top holder of U.S. Treasury bonds with $739.6 billion as of January, earlier expressed concern over its investment as the world's largest economy battles a deep recession.

"The outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system," Zhou wrote in an essay posted on the bank's Web site Monday. Zhou's comments come ahead of the G20 summit from April 2 in London, where world leaders and international organizations including the IMF are to discuss reforming the financial system.

He suggested the IMF's Special Drawing Rights, or SDR, could serve as a super-sovereign reserve currency as it would not be easily influenced by the policies of individual countries.

Russia has also proposed the summit discuss creating a supranational reserve currency. The IMF created the SDR as an international reserve asset in 1969, but it is only used by governments and international institutions.

A gradual process

"The reform should be guided by a grand vision and start with specific deliverables," Zhou wrote. "It should be a gradual process that yields win-win results for all."

However, China's proposal was unlikely to lead anywhere because the SDR is not a currency system backed up by a government, independent Shanghai-based economist Andy Xie said.

Xie said the proposal was probably a protest aimed at Washington's plan to buy one trillion dollars of its own debt, diluting the value of China's dollar reserves and raising fears of inflation.

"It's a sad situation: China is America's banker. America owes so much to China, but it's not afraid of China," he said. "China is America's hostage. It's not the other way around."

As the world's main reserve currency, U.S. dollars account for most governments' foreign exchange reserves and are used to set international market prices for oil, gold and other currencies. As the issuer of the reserve currency, the U.S. pays less for products and borrows more easily.

The U.S. dollar replaced the British pound as the world's primary reserve currency after World War II.

China holds $1.95 trillion in foreign exchange reserves, making it vulnerable to swings in currency values.