

China's central bank calls for new reserve currency - bokonist
http://www.ft.com/cms/s/0/7851925a-17a2-11de-8c9d-0000779fd2ac.html

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kirse
Coming from China, I think it is _absolutely_ fair that they have to deal with
the dollar as the reserve currency because we had to put up with the decade of
bullshit from them pegging their yuan to the US dollar.

The major reason they're holding an excess of US assets is because they
decided for 10+ years to ensure that it was artificially cheap for anyone in
the US to import from China. We complained to hell about fair trade and
threatened import taxes, but we let it slide mostly in the name of diplomacy
and cheap consumption.

Well now China gets to reap the consequences of that decision and I have not a
single ounce of remorse for them.

Great article from back in '03 when this was still an issue:
<http://www.treas.gov/press/releases/js774.htm>

~~~
dejb
What's with all the moralising? You think China are under some sort of moral
obligation to take their losses cause they 'had it coming' for keeping the
yuan low? Just like the US they'll do whatever they see is in their advantage.
I don't see anyone saying you should feel remorseful but if China want to move
towards other currencies then that is their right.

~~~
DanielBMarkham
I don't think morals have to enter into it. If a country artificially ties its
currency to the dollar for purposes of inflating trade, it's going to end up
with a bunch of dollars that aren't worth so much.

Seems like natural consequences to me.

I'm dubious that the system is so simple that simply changing the reserve
currency is going to fix anything. But if I were an expert in international
finance, I wouldn't be working on startups. And I'd probably be a lot more
boring.

~~~
dejb
I agree the Chinese are in a bit of a pickle what with holding so many US
dollars. The fact that they are prepared to risk their investment by saying
this is suggestive. In the end I think the US would still like to hold onto
the USD as the defacto world currency and the Chinese move is more a warning
that that this can be lost if the value drops too much.

Either way I'm not sure how much it matters who's 'fault' it was now.

But I'm not an expert in international finance either. The startup I'm a part
of does very well when the USD is strong but that is about it.

------
anamax
The actual statement doesn't make any sense: "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'."

"controlled by the IMF" does not imply stable. While the IMF is somewhat
disconnected from individual nations, it is gamed.

I suspect that this is China's way of saying that it wants to play too. Since
it's big enough to break the IMF, it may just be a public announcement of
China's new role.

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bokonist
This is the first time I've ever heard a Chinese official this high up call
for replacing the dollar. Can anyone else think of any other examples? If this
is really a new development, then it's very significant news.

~~~
dc2k08
There has been news about it but it has not been given much coverage.
Christmas eve last, it was reported by AFP and Xinhua (Chinese Govt. Media)
that China was trying to create conditions for the yuan to become an
international settlement currency and would use the yuan in transactions with
neighbouring economies on a trial basis:

[http://www.marketskeptics.com/2008/12/china-makes-yuan-
inter...](http://www.marketskeptics.com/2008/12/china-makes-yuan-
international-currency.html)

I link to a blog and not the articles because I think the blogger makes some
great commentary. He also gives his incite to yesterday's news in the first
link on the right. Definitely worth a read.

------
light3
This is interesting, this would certainly be a very new direction for foreign
currency.

Another interesting point is this was not raised during the 2008 APEC meeting,
much to the dismay of European countries.

However this time around things seem to have progressed, and Russia has put
forth the proposal to the G20, it will be interesting to see how this plays
out.

<http://en.rian.ru/world/20090323/120689432.html>

and this one with some humor:

<http://mnweekly.ru/news/20090305/55369676.html>

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sethg
IIUC one downside of the European monetary integration is that if, say, the
German economy is doing fine while Italy is in recession, then Italy cannot
simply loosen up its currency to boost demand while Germany keeps its currency
tight. Instead, the ECB has to either keep the euro tight, screwing Italy, or
loosen it, screwing Germany. And since other pan-European political
institutions are not as strong as the US Federal Government, setting Europe-
wide economic policy for everything _other than_ currency is difficult.

The upside of the euro may be greater than the downside, but it seems to me
that a new global reserve currency would be mostly downside, for this reason.
Then again as a US citizen I have a vested interest.

------
1gor
>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”.

Gold exists already.

~~~
Retric
Gold is highly unstable which is bad. It's value fluctuates even faster than
the USD.

~~~
1gor
I would argue that USD and the rest of currncs are unstable vs. gold.

Supply of gold is fixed. Supply of paper money is at the whim of greenspans.

~~~
Retric
If you compare it with a basket of goods it's still highly unstable. It's not
a true random walk, but day to day gold fluctuations can be extreme and it's
still in the middle of a bubble so expect a sudden crash some time soon.

~~~
bokonist
Gold flucuates enormously because it is currently not the official currency of
any country. If it ever became a major currency, it's price would sky rocket
as it would have to absorb a huge amount of new monetary demand. Thus gold's
current price fluctuations are basically a bet on the demise of Bretton Woods
II. But if gold ever became an official currency, it's price would shoot up
and then stabilize. After stabilizing its price would be more stable than any
other form of currency. Gold has the lowest flow to stock ratio of any good,
so its a perfect nash equilibrium as a currency. And empirically, the
classical gold standard from 1865-1913 had much greater price stability than
we have now.

~~~
marvin
This is pretty interesting. How much would the price of gold skyrocket if it
were adopted as the international currency peg/medium of exchange/etc? Divide
all the money in the world on the amount of gold available. That's the new
price per ounce of gold. It would be a _massive_ increase.

With a gold price that high, it might become profitable to just synthesize
gold in a nuclear reactor. Which would destroy the point of imposing a gold
standard in the first place. Even if it wouldn't be profitable with today's
technology, it would become a very lucrative field. Which you would have to
outlaw. Etc. etc. etc.

What all the gold nerds are really clamoring for is an international agreement
saying that no one will ever increase the money supply. This won't happen. A
system of fixed currencies is as unrealistic as every nation suddenly deciding
to adopt communism.

~~~
cousin_it
You could tie the currency to energy, then individual people synthesizing it
would be a good thing.

~~~
asmithmd1
would it? Say you invented infinite, free, clean energy. You would wind up
heating the earth as all the energy would have to dissipate somewhere. What
does everyone really want? Happiness - if you generate happiness then your
Wuffie account should be credited.

~~~
cousin_it
Energy could easily be used to cool the earth too. Also in my scheme ordinary
citizens end up building power plants, whereas in yours they end up dealing
drugs.

~~~
asmithmd1
you say that like it's a bad thing;)

------
Rod
_"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."_

Monetary policy is definitely not my _forte_ , but why not use the Euro
instead of the U.S. Dollar then? The Euro is not connected to any individual
nation, after all. Creating a new currency takes such a long time that I
wonder whether it would be practical.

~~~
redsymbol
Well, from what I read in the FT article, they are actually implying a shift
from US dollars to SDRs, which already exist and are well established. SDRs
are effectively a currency in the ways that matter, at least at this
(international finance) level. Since the SDR is defined in terms of the US
dollar, the euro, and a couple of other currencies, the SDR is potentially
more stable than either the dollar or the euro alone.

Another thought: Changing from one reserve currency to another is kind of a
big deal - you can't just go to some currency exchange window and say "hello,
I'd like to exchange this $372.4 billion in USD into Euros please". Throws the
markets out of whack. So perhaps another reason for choosing the SDR is that
they are less likely to need to change it in the future. Say thirty years from
now if conditions change, and the euro starts hyperinflating and the USD is
solid again, the SDR value will be relatively stable.

I'm at best an amateur in these matters, so I could be mistaken. Not to
mention the fact that I did not read the original article (at
[http://www.pbc.gov.cn/english/detail.asp?col=6500&id=168](http://www.pbc.gov.cn/english/detail.asp?col=6500&id=168)
\- the page will not even render readably in any browser I have). Anyone who
can read Chinese care to comment?

 _Edit:_ I threw around a little jargon above... SDR stands for "Special
Drawing Rights", and can be viewed as a kind of pseudo-currency used by the
IMF. See <http://en.wikipedia.org/wiki/Special_Drawing_Rights>

~~~
bokonist
It's hard to see how that kind of basket would work. If you don't have fixed
pegs between the currencies, then you have not increased the stability of the
system. If you have fixed pegs, then each member country must cede complete
control of its monetary policy to the international bank. Otherwise the
temptation to inflate would be too great.

~~~
dejb
I think it would work something like this

1 SDR = 1.3 USD + 1 EURO + 80 YEN + 0.5 GPB + etc

It isn't perfectly stable but it isn't so dependant on any individual
currency. Even if the USD halves in value then the total impact is less than
25% on the SDR. And presumably the other currencies would increase to offset
much of the impact.

As currencies changed in value over time you would probably need to re-balance
the percentages. I'm not sure how this would happen.

EDIT: This page actually has the current ratios
<http://www.imf.org/external/np/fin/data/rms_sdrv.aspx>

~~~
cturner
Do you think there are any benefits doing it against currencies rather than
against a basket of resources?

Money serves two purpose: store of value, mechanism of exchange. If inflation
kicks in, people with government backed currencies that are easing will be
caught with their pants down.

I've been thinking about this on a small scale recently. Now there's no
systematic reason you couldn't have your cash held by a bank in terms the GS
commodities index
([http://www2.goldmansachs.com/services/securities/products/sp...](http://www2.goldmansachs.com/services/securities/products/sp-
gsci-commodity-index/index.html)) and then convert it to local currencies at
the last minute - either when you're paying your bill or getting money from an
ATM. They could manage the risk of moving it into and out of currencies (so
that they have liquidity to service people at ATMs) as part of their service.

I spent my first year in London operating like this against AUD - being paid
into an Australian account and spending from it on Visa debit. (You're subject
to foreign exchange risk, but actually that's just a perspective thing. You're
subject to it when you've got pounds via opportunity cost, you just don't
realise it.)

China is doing a crude version of this at the moment - converting USD into
commodities countries at a rapid rate. But if they want to get a new currency,
why not peg it against tangibles rather than building a new castle on already
shaky foundations?

~~~
dejb
It's an interesting idea. Seems better than just gold. However I don't
necessarily think it would be more stable. Changes in supply and demand of
resources could have numerous unintended consequences.

~~~
cturner
That's the reason you spread it against a basket of them instead of against a
single one :)

