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China Seeks New Global Reserve Currency - Odyssee - 06-28-2009
JUNE 28, 2009, 223 A.M. ET
BEIJING -- China's central bank reiterated its call for the creation of a new international currency that could replace currencies like the dollar in countries' official reserves.
In its annual report on financial stability, issued Friday, the People's Bank of China said the country will push reform of the international currency system to make it more diversified and reasonable. While it didn't specifically target the U.S. currency, it said it aims to reduce over-reliance on the current reserve currencies, of which the dollar is the biggest.
"To avoid the shortcomings of sovereign credit currencies acting as reserve currencies, we need to create an... international reserve currency that can maintain the long-term stability of its value," the PBOC said.
The report, a lengthy document that addressed a broad range of issues, reiterated a proposal made by PBOC Governor Zhou Xiaochuan in March to use Special Drawing Rights, the synthetic currency developed by the IMF, as a super-sovereign reserve currency. That proposal, made just before the G20 summit in London earlier this year, appeared in an essay authored by Mr. Zhou and posted on the PBOC's Web site.
The call for a new global reserve currency was among a host of factors exerting pressure on the dollar Friday. The U.S. currency fell during New York trading against the U.K. pound, Australian dollar, yen, Swiss franc and euro.
The PBOC comments "fuel concern about reserve diversification undermining the U.S. currency," said analysts at Credit Suisse.
Senior Chinese officials, including Premier Wen Jiabao, have repeatedly expressed concern about the dollar, which comprises most of China's roughly $2 trillion in foreign exchange reserves. China is concerned that the dollar's dominance exacerbates global financial imbalances. It also worries that massive U.S. government borrowing to support stimulus spending could eventually lead to inflation, hurting the value of China's holdings.
The SDR proposal's inclusion in the central bank's latest stability report appears to formalize the idea as an official view of the central bank, which ultimately reports to China's State Council.
China's central bank said in the annual report that under the proposal, the IMF should "manage part of the reserves of its members" and be reformed to increase the rights of emerging markets and developing countries.
It also urged stronger monitoring of countries that issue reserve currencies. Central banks around the world hold more U.S. dollars and dollar securities than they do assets denominated in any other individual foreign currency.
The central bank's report, on the PBOC Web site, comes a day after Li Lianzhong, an academic at a key think tank under the Communist Party of China, said China's yuan should become the fifth currency in the SDR, joining the U.S. dollar, yen, euro and sterling. Mr. Li proposed an equal 20% weighting in the SDR basket for the five currencies.
In its report Friday, the PBOC also said China is facing both deflationary pressures in the short term and inflationary pressures in the longer term.
Deflationary pressures have strengthened this year partly because of overcapacity in the domestic market due to weak external demand and falling global commodity prices, it said.
However, the possibility of global price rises after market confidence recovers, excessive money supply, and increasing fiscal deficits in some economies will likely create inflationary pressures in the longer run, the report said.
The central bank's report echoed a theme in comments Thursday by former PBOC adviser Yu Yongding. At a three-day United Nations conference on the economic crisis, Mr. Yu pushed for monetary and financial-infrastructure reforms.
"A global reserve system is a critical step in addressing these problems to ensure that when the global economy recovers, it moves into strong growth without setting the stage for another crisis," Mr. Yu said.
âLiu Li
âJoan R. Magee and Riva Froymovich contributed to this article.
http//online.wsj.com/article/SB124616719675965215.html