China renews calls for new reserve currency

KEVIN HAMLIN

CHINA’s central bank renewed its call for a new global currency and said at the weekend that the International Monetary Fund (IMF) should manage more of members’ foreign exchange reserves, triggering a decline in the dollar.

“To avoid the inherent deficiencies of using sovereign currencies for reserves, there’s a need to create an international reserve currency that is delinked from sovereign nations,” the People’s Bank of China said in its 2008 review.

The IMF should expand the functions of its unit of account, special drawing rights, the report said.

The restatement of governor Zhou Xiaochuan’s proposal in March added to speculation that China will diversify its currency reserves, the world’s largest at more than 1,95-trillion.

Chinese investors, the biggest foreign owners of US treasuries, cut holdings by 4,4bn in April to 763,5bn after Premier Wen Jiabao expressed concern about the value of dollar assets. That reduction came a month after China boosted its holdings by 23,7bn to a record.

“It’s unrealistic to think China will materially diversify away from the dollar in the short term,” said Donald Straszheim, a former Merrill Lynch & chief economist who runs Los Angeles-based Straszheim Global Advisors, a consulting firm for investors in China. “Listen to their words, but also watch their actions. Both are important.”

President Barack Obama needs the support of China as the US tries to spend its way out of the recession. The dollar index that measures the currency’s performance against six trading partners fell 0,8% to 79,8 in New York on Friday. Bloomberg