America and China battle over the dollar

America and China battle over the dollar

It's out in the open at last. China has thrown a challenge to America. Beijing wants a new international reserve currency to replace the dollar.

Urging reform of the international monetary system, Chinese central bank governor Zhou Xiaochuan called for "an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run".

President Barack Obama fought back, calling the the dollar "extraordinarily strong" due to confidence in America's economic prospects and said there was no need for a single global currency.

"As far as confidence in the U.S. economy or the dollar, I would just point out that the dollar is extraordinarily strong right now," Obama told a nationally televised news conference. "The reason the dollar is strong right now is because investors consider the United States the strongest economy in the world with the most stable political system in the world," he said. The New York Times has the full transcript of the press conference. CNN is showing the video.

One reason why the Chinese central bank governor wants the dollar replaced as the international reserve currency is to reduce capital flow to America. He said:

Currently, U.S. dollar is used in most international trade and financial transactions, and is also the most important reserve currency. The IMF data showed that the U.S. dollar accounted for 63.9% of the total foreign reserves by the end of 2007. When countries increase savings and if these savings are in the form of dollar denominated foreign reserves, capital will inevitably flow into the US.

In another speech, he said:

A super-sovereign reserve currency not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity.

He even cited Keynes -- who preferred welfare states to communism and totalitarianism -- to back up his argument. He said:

Back in the 1940s, Keynes had already proposed to introduce an international currency unit named "Bancor", based on the value of 30 representative commodities. Unfortunately, the proposal was not accepted. The collapse of the Bretton Woods system... indicates that the Keynesian approach may have been more farsighted. The IMF also created the SDR (Special Drawing Rights) in 1969... Yet, the role of the SDR has not been put into full play...

He added:

Special consideration should be given to giving the SDR a greater role. The SDR has the features and potential to act as a super-sovereign reserve currency. Moreover, an increase in SDR allocation would help the Fund address its resources problem...

Zheng not only attacked the dollar but also defended China's current account surplus, high savings rate, Confucianism -- almost everything except Beijing's policy towards the Dalai Lama.

Both his speeches are available in English on the People's Bank of China website.

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