China's central bank chief 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 Special Drawing Right (SDR).
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 Monday on the bank's website, www.pbc.gov.cn.
"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," Zhou said.
Zhou did not refer directly to the dollar.
But his speech, issued in English as well as Chinese, spells out in detail China's dissatisfaction with the primacy of the US currency, which Zhou says has led to increasingly frequent international financial crises since the collapse of the Bretton Woods system of fixed but adjustable exchange rates in 1971.
"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.
"The desirable goal of reforming the international monetary system, therefore, is to create an international 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," he added.
A super-sovereign reserve currency not only eliminates the risks inherent in a credit-based currency such as the dollar -- in contrast to one backed by gold -- but also makes it possible to manage global liquidity, Zhou argued.
"And 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 pressing 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 mismanagement of the world's leading economy.
Zhou acknowledged that establishing a new reserve currency that commands wide acceptance may take a long time. It would be a "bold initiative that requires extraordinary political vision and courage".
Allocating more SDRs would not only give the IMF more resources but would also help it address imbalances in the representation and voice of developing countries in the IMF, where the United States wields a veto over major decisions.
As well as a further allocation of SDRs, Zhou proposed the following steps to broaden the unit's use so it can fully satisfy member countries' demand for a reserve currency:
-- Set up a settlement system between the SDR and other currencies so it 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.
-- Further improve the valuation and allocation of the SDR. The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies.
Zhou said the IMF, with its universal membership and mandate to maintain monetary and financial stability, had a natural advantage to act as the manager of its members countries' reserves in the form of the SDR.
"This arrangement will not only promote the development of SDR-denominated assets, but also partially makes the management of liquidity in the form of the existing reserve currencies possible. It can even lay a foundation for increasing SDR allocation to gradually replace existing reserve currencies with the SDR," he said.
(China Daily March 23, 2009)