China wants IMF unit to replace dollar as a reserve.
BEIJING: China on Monday proposed a sweeping overhaul of the global monetary system, outlining how the dollar could eventually be replaced as the world's main reserve currency by the IMF's Special Drawing Right.
The SDR is an international reserve asset created by the International Monetary Fund in 1969 that has the potential to act as a super-sovereign reserve currency, Zhou Xiaochuan, governor of the People's Bank of China, said in remarks published on the central bank's Web site.
"The role of the SDR has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system," he said.
Zhou diplomatically did not refer explicitly to the dollar.
But his speech, issued exceptionally in English as well as Chinese, spells out Beijing's dissatisfaction with the primacy of the U.S. currency, which Zhou says has led to increasingly frequent global financial crises since the collapse in 1971 of the Bretton Woods system of fixed but adjustable exchange rates.
"The price is becoming increasingly high, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws," Zhou said.
Jim O'Neill, chief economist at Goldman Sachs in London, said the dollar-based system of floating exchange rates had demonstrated great flexibility down the years.
"But over time, as the world is taken off the steroids of the overleveraged U.S. consumer, you can't have the same dollar dependence as we have had. But who can provide it? And the answer is, if it functioned properly, maybe the SDR could have a much bigger role," O'Neill said.
A super-sovereign reserve currency would not only eliminate the risks inherent in fiat currencies such as the dollar -- which are backed only by the credit of the issuing country, not by gold or silver -- but would also make it possible to manage global liquidity, Zhou argued.
"When a country's currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability." he said.
Reform of the international monetary system is likely to take a back seat to the more urgent task of economic and financial stabilization when leaders of the Group of 20 developed and emerging economies meet in London on April 2.
But Zhou's speech shows that the issue is a pressing one for China, whose top officials regularly bemoan the volatility of the dollar and what they see as U.S. economic mismanagement.
Creating a new, widely accepted reserve currency may take a long time, Zhou acknowledged. It would be a "bold initiative that requires extraordinary political vision and courage".
Allocating more SDRs would give the IMF more resources and help it address imbalances in power within the fund, where big emerging economies like China muster a fraction of the votes cast by Europe and by the United States, which wields a veto.
As well as a further allocation of SDRs, Zhou proposed a series of steps to broaden the unit's use so it can evolve into a reserve currency:
-- Set up a settlement system with other currencies so there SDR can be widely accepted in global trade and financial transactions. Currently, the SDR is largely an artificial unit used by governments and international institutions.
-- Actively promote the use of the SDR in trade, commodities pricing, investment and corporate bookkeeping.
-- Create financial assets denominated in SDRs to increase its appeal. The introduction of SDR-denominated securities, which is being studied by the IMF, would be a good start, Zhou said.
-- Expand the basket of currencies forming the basis for valuing the SDR to include currencies of all major economies.
If the SDR were backed by real assets, such as a reserve pool entrusted to the IMF, confidence in its value would rise and destabilising currency speculation would be deterred, Zhou said.
