Shanghai Business Daily commentary

Leaders from the Group of 20 nations (G20) gathered in London Wednesday on the eve of their crucial summit talks, and President Hu Jintao and US President Obama met face to face for the first time yesterday.

The G20 summit was held against the background of the global financial turmoil which has affected almost all countries and regions. The main theme of the summit is how to deal with the ongoing financial crisis. And Sino-US cooperation in coping with financial crisis also topped the agenda of Hu and Obama's first meeting.

Hu said, "China, as a responsible country, will actively cooperate with other countries to combat the financial crisis. China will continue to strengthen coordination of its macroeconomic policy with the international community, promote reform of the international monetary system, actively safeguard the stability of the multilateral trading system, and make its contribution to the recovery of the world economy." Hu added, "We will continue to contribute to the economic development of the entire world."

China has the largest foreign exchange reserves in the world and its huge savings have become powerful weapons to fight the economic crisis and powerful backup for the government's stimulus plan. Therefore the international community is showing great interest in China's foreign exchange reserves and savings.

China's foreign exchange reserves and savings will not only be used to stimulate its domestic economy, but will also be invested in other countries, especially in the US and US assets, in order to support president Obama's stimulus plan. This demonstrates that China is a responsible member of the international community and accepts its obligation to contribute to global economic recovery.

Although China is still a developing country, if it invested all its foreign exchange reserves and savings overseas, the end result would be inflation. But just leaving the money in the bank will result in its value depreciating as the crisis unfolds.

China has invested a vast amount in the USA and in US assets and will continue to purchase US treasury bonds, a move which has been welcomed by both President Obama and Treasury Secretary Timothy Geithner. This will enhance US ability to cope with the financial crisis, which in turn will benefit China.

The US is still the biggest economic power in the world and its economic recovery is crucial for the world economy. China's economy still largely depends on exports and its problems have largely resulted from a fall in exports. US economic recovery will enhance demand, which in turn will help lift China out of the economic crisis. Furthermore, the US financial crisis has reached bottom and it will be beneficial for China to invest its reserves in the US and US assets, because it will help to maintain and even increase their value.

But the biggest risk associated with investing in the US and US assets is the dollar. The US could easily transfer its own financial crisis to the other countries by printing dollars. Although US government officials have repeatedly assured China that China's US investments are safe, they have so far failed to allay China's concerns.

In a recent article, Zhou Xiaochuan, the governor of the People's Bank of China, proposed the creation of a super-sovereign reserve currency. While it is impractical to replace the US dollar with a super-sovereign currency for the time, Zhou clearly expressed China's general position regarding the creation of an international currency.

Zhou said "the issuing countries of reserve currencies cannot both maintain the stability of the value of their currencies and manage global liquidity." This requires the current issuing country of the reserve currency, the US, to shoulder additional responsibilities. With regard to China, the US should guarantee the security of China's investments in the US. "An increase in Special Drawing Rights (SDR) allocations would help the International Monetary Fund address both its resource problem and the reform of its voting system," said Zhou. "Efforts should be made to push forward a SDR allocation. This will require political cooperation among member countries."

China, as the fourth largest economy, has fulfilled its responsibilities to the world community. China should, in return, get a greater say in the international monetary system. And China will make its perfectly reasonable demands heard at the G20 summit.

(China.org.cn translated by Zhang Ming'ai, April 3, 2009)