China Wants to Divorce the Dollar

by Julia Zhu

Just over one week before President Barack Obama and other world leaders met in London for a summit focusing on the global recession, China was making clear it wants a greater say in managing economic policies worldwide. The latest blast from Beijing: a call by China's top central banker, Zhou Xiaochuan, to dump the U.S. dollar as the world's most important currency.

Zhou: reserve currencies based on a single issuing country just doesn’t work:

Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries’ demand for reserve currencies. On the one hand–the monetary authorities can not simply focus on domestic goals without carrying out their international responsibilities. On the other hand–they cannot pursue different domestic and international objectives at the same time. They may either fail to adequately meet the demand of a growing global economy for liquidity as they tries to ease inflation pressures at home, or create excess liquidity in the global markets by overly stimulating domestic demand.

The goal, Zhou writes in a paper released on the website of People’s Bank of China on Mar. 23, is to "create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run."

Zhou suggested the IMF's Special Drawing Rights, or SDR, could serve as a super-sovereign reserve currency.

The idea of an international currency is worth considering. We do have a global economy. To facilitate trade, we need an international currency. I mean, how can we have a global economy unless we also have a global currency?

However, pretty much everyone agrees replacement of U.S. dollars with an international currency is not going to happen any soon. Here’s why:

First, the U.S. isn’t welcoming the idea and will fight against it. Speaking on Mar. 24 at a congressional hearing in Washington, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke both said they categorically oppose the change. Obama came out with support of the US Dollar and to reply to the Chinese he stated, “I don’t believe there is the need for a global currency.”

Second, the U.S. dollar is already established as a medium of exchange. To replace US dollars, the new currency would have to be adopted worldwide by private companies for international trade transactions, a tremendous challenge.

No matter what, Chinese are now nervous holding U.S. dollars. Taxi drivers in big cities such as Beijing and Guangzhou don’t take U.S. dollars as they did before. I think many of us are nervous holding dollars and maybe rightfully so. Maybe we should learn from Jim Rogers, who walk around with gold coins in his pocket (see Bloomberg.com Jim Rogers video with Bernard Lo) in case the whole financial system collapses.