U.S. still has clout

As the largest creditor of the United States, China has made several recent comments on its concern about the safety of its U.S. dollar assets.

For example, Hu has called for "enhanced supervision" of the macroeconomic policies of various countries, the major reserve currency-issuing nations in particular, with a special focus on their monetary policy.

Zhou Xiaochuan, governor of the People's Bank of China (PBOC), the central bank, last month called for a super-sovereign currency to end the U.S. dollar's dominance as an international reserve currency. Zhou suggested overhauling the global monetary system by boosting the use of Special Drawing Rights (SDRs, a monetary unit used by the International Monetary Fund) as an alternative to the U.S. dollar.

His proposal sparked heated discussion among world leaders, but so far, there has been more talk than action. Zhou's idea was supported by Russia and Brazil, but it was dismissed by U.S. President Barack Obama, who said he did not believe there was a need for a global currency.

In many experts' view, the U.S. dollar won't lose its global dominance overnight. So it's not entirely surprising nor disappointing that the G20 leaders did not reach a consensus on China's proposal.

The idea of proposing a super-reserve currency itself showed the weakening status of the U.S. dollar. However, since the United States was still the world's most developed country and the biggest beneficiary of the current global monetary system, it would not cede its currency power lightly, said Hua Sheng, a former policy advisor who was involved in many important economic policies in China such as shareholding reform.

Guo Tianyong, a professor at the China Central Finance University, said China fleshed out the idea just days before the G20 meeting, and the proposal was meant more to send a message than to translate into something real.

"It sends a clear message to the United States that countries like China have complaints about U.S. monetary policy. The U.S. government should be very cautious next time when dealing with money printing plans," he said.

Zhou's remarks were not intended to achieve a concrete result at the London summit but to shape future discussions, said Xu Bin, a professor with the Shanghai-based China Europe International Business School.

"It is a strategic move with a lot of vision," he said.

Although the U.S. dollar's pre-eminence would not be hurt in the short run, it was inevitable that the world reserve currency system would expand to a mix of currencies instead of one, said Hua.

The world reserve currency system should not be tied to one country but should develop into a multipolar system based on a group of currencies, said Yin Jianfeng, researcher with the Chinese Academy of Social Sciences, a government think tank.

He said with such a trade-off, the international monetary system could be sustainable in the long term.

"The Renminbi should take a key part in the international reserve currency basket, although that will take time," he said.

"I think China should play a cooperative role with Japan, South Korea and other Asian countries to introduce a regional currency, while the world is trying to replace the old reserve currency system," Jeffrey Sachs, special adviser to UN Secretary-General Ban Ki-moon, told the China Daily newspaper on April 3.

He said the U.S. dollar, British pound, euro and a regional currency in Asia could form a basket of global reserve currencies.

Market forces decide

Although China is moving forward on the road to having an international currency, it will take its time and achieve its goals in a balanced way, analysts said.

"It is possible that the global financial crisis will facilitate the process of making the yuan internationally accepted, but there is no need to push for that," PBOC vice governor Yi Gang told Xinhua in early March.

A currency's international acceptance would be ultimately decided by market forces, not government fiat, said Jiao Jinpu, a PBOC economist.

He said China should continue to increase the yuan's use in regional trade settlement and pricing as a foundation for expansion of its role.

Yin said there were still many areas for improvement in China before the yuan would have a global reach. One really pressing area, he said, was to make the economy more domestically driven. Declining exports could produce a deficit in the current account.

China must rebalance

The United States hadn't forced China to accumulate such a huge U.S. dollar stockpile, so it was up to China to reduce its reliance on exports as a source of growth and keep foreign reserves at a balanced level, said Yin.

In addition, China lacked the kind of deep financial markets that could supply varied derivative products, which made yuan less appealing, Yin said.

He also noted that economic and military muscle were, as always, the fundamental factors behind having a strong reserve currency.

Zuo Xiaolei, chief economist with Galaxy Securities, said China did not actually have many choices at present, since few investments were likely to show easy profits given the current global economic downturn.

"Political and economic ties bind China and the United States together; they are in the same boat," she said.

(Xinhua News Agency April 8, 2009)