Top Chinese Economist Comes Out Against Dollar-Centric Economy

BEIJING (Reuters) - Dollar dominance is sowing the seeds of financial turmoil, and the solution is to promote new reserve currencies, a Chinese government economist said in a paper published on the eve of a G20 meeting about how to reform the global monetary system.

Although not an official policy statement, the paper by Xu Hongcai, a department deputy director at the China Center for International Economic Exchanges, offered a window onto the domestic pressures bearing on Beijing to move away from a dollar-centric global economy.

The China Center, a top government think tank, has represented the Chinese government in organizing a forum on Thursday in Nanjing that will bring together finance ministers, central bankers and academics from the Group of 20 wealthy and developing economies.

Xu's paper, "Reform of the international monetary system under the G20 framework," was published in Chinese on the center's website this week (www.cciee.org.cn).

"Nations around the world have no way of restricting dollar issuance by the Federal Reserve. The current international monetary system lacks both stability and fairness," Xu wrote.

He said the global monetary system had fallen into a "dollar trap." While it would be sensible to reduce dollar holdings in official currency reserves, nations cannot easily cut back, because doing so would only lead the dollar to weaken and so hit the value of their assets, he said.

CHINA'S DILEMMA

China's dollar dilemma is particularly acute, though Xu did not say as much. China had $2.85 trillion in foreign exchange reserves at the end of last year, more than any other country. About two-thirds are estimated to be invested in dollars.

Beijing has repeatedly warned that loose U.S. monetary policy threatens the dollar, but it has continued to accumulate dollar assets at the same time, adding about $260 billion of Treasury securities last year, according to U.S. data.

With the Chinese government determined to limit yuan appreciation, it must buy a large amount of the dollars streaming into the country from its trade surplus and recycle those into U.S. investments.

Xu was not shy about proposing ways to remake the global monetary system.

For a start, he said diversification was needed, with several reserve currencies. Other countries could reinforce these currencies' status by buying or selling them to keep their exchange rates stable, Xu said.

He said the International Monetary Fund should also play a policing role.
"If any international reserve currency depreciates, the IMF would be responsible for issuing a timely alert, increasing international pressure to force the country in question to take measures to stabilize its currency," he said.

LITTLE SUPPORT

Xu's call for regular intervention to keep key currencies steady is unlikely to find much support among developed economies, which have come to view a system of floating, largely market-determined exchange rates as the most stable underpinning of the global economy.

When the G7 rich countries banded together to weaken the yen earlier this month, it was their first joint intervention since 2000 and came against the extraordinary background of speculator-driven yen appreciation after Japan's devastating earthquake, tsunami and nuclear crisis.

Xu also suggested that the Special Drawing Right, the IMF's unit of account, should gradually be built into a global reserve currency, although he noted this would still be a long time off.
Chinese central bank governor Zhou Xiaochuan said two years ago that the SDR would be better than the dollar as a supra-national reserve currency, disconnected from the interests of any single country.

With France at the helm of the G20 this year, French President Nicolas Sarkozy has seized on the SDR idea, promoting it as a possible alternative to the dollar-led global monetary order. But China itself appears to have cooled on the SDR, instead describing it as a largely symbolic issue.

For all the defects in the global monetary system identified by Xu, foreign officials, especially from the United States, have said that China has a much easier solution within its grasp.
By allowing the yuan to float freely, the Chinese central bank would no longer need to buy dollars flowing into the country and so could drastically slow its accumulation of foreign exchange reserves.

(Reporting by Simon Rabinovitch; Editing by Ken Wills)

Copyright 2011 Thomson Reuters. Click for Restrictions.

Comments

[Sharon Reed]

05:59 PM on 04/03/2011

Can Americans stop thinking that they have done China a favour? All you have done is done for your own interests. If you buy Chinese goods, it's not because you want to help the Chinese people but because it's cheap and it benefits you. This is capitalism, not charity. China owe America nothing so stop the nonsense about the Chinese being unappreciative.

And by the way, the American dollar's status as the world's reserve currency is hugely unfair to countries all over the world. As the world's reserve currency, any printing of US dollars by America would mean that other countries are being taxed by the US government. Yes, independent sovereign nations being taxed by the US government. In economics, this is called seigniorage. This is a form of currency manipulation too. And recent actions by the US federal reserve has only served to export your crisis to other countries like those in the EU. Why do you think Germany and France have not been supportive of the US at the G20 recently.

So when in glass houses, don't throw stones and start accusing other countries of doing so. Of course unless you subscribe to the theory of American exceptionalism. Then I rest my case.

[charlie smerlick]

04:48 PM on 03/31/2011

Let's look at things straight up China---All we {the good old usa} has to do is quit buying your junk and quit fighting your wars,and you are in deep do-do--if you want to change the rules which you have so richly reaped the rewards from whenever you want to ----remember this--We are the beacon of freedom in the world and you guys are still the most repressive country in the world-we thought Obama would help change things,but so far he is licking your boots---maybe he was the manchurian candidate after all---but you can never take us down in any way shape or form---you are the ones who have forgotten your past ,we keep renewing ours---i'd say stuff it to you !!!

[Genatomics]

02:58 PM on 03/31/2011

oh yeah, because China would be so responsive to the IMF's monetary "police".... Give me a break! The world's largest currency manipulator wants its currency to rise to prominence throughout the world, so they can devalue the dollar. What a surprise!
Don't be fooled America! If the dollar were as worthless as these commies say, they wouldn't be trying to supplant it.
More economic warfare between China and the USA. Thanks GOP & Corporate American for giving them the tools + spine to even propose something like this. I hope your investments are all in Chinese currency, fools.
Folks, this is the example of "lay down with dogs, prepare to get fleas". Don't buy it, and push US companies to pull out of the PRC.

[s002wjh]

03:56 PM on 03/31/2011

did you read other news from nbc or cnn?

"the value of dollar drop to lowest since WWII"

3 years ago exchange rate between canadian vs US dollar was $1 = 1.3x canadian. now its 1 to 1 ratio

[Genatomics]

04:19 PM on 03/31/2011

Don't you speculate on this any further than what is spoon-fed by MSM?

In other words, "The value of other currencies have risen farther than ever since WWII."

The instrinsic worth of the dollar is not measured in exchange rates, but I'm sure you didn't need me to tell you that.

[Amalek]

11:03 PM on 03/31/2011

The Yuan is pegged to the dollar, and is currently holding the dollar up.

[Gumby69]

01:32 PM on 03/31/2011

The American dollar is the new Peso much over-valued. And the chinese should float their currency.

[redmaple]

11:19 AM on 03/31/2011

Don't let the yuan become the reserve currency. Dollars are full of cocaine. Yuan are full of avian flu. Have you ever seen chinese money? It's the dirtiest money I've ever hold in my hands. You have to wash after touching it.

[Gumby69]

01:33 PM on 03/31/2011

It's got coodies! :(

[OG]

08:40 AM on 03/31/2011

a stable currency is what ever the oil exporting nations want nothing else all economies are tied to energy consumption. So what ever the currency they will trade oil for is the world's most viable currency and today the oil is traded in dollars! Thats why american interests are so strongly focus in the middle east and we will do what is ever needed to prop up unpopular regimes

[Mike-South Carolina]

09:38 AM on 03/31/2011

Don't agree. Oil interests are important but not determinate. The world is more complex than the oil economy.

[mike72]

06:45 AM on 03/31/2011

The day when China stop pegging its Yuan to Dollar is when the Dollar stops being the mandated internatonal trade token.

Before then, China has no choice but to keep it up with the massive paper dollar printing.

The core of all evil is US allowing itself to print money at will and force the world to take this money as the only viable legal tender without any resource backing it.

[Amalek]

08:41 AM on 03/31/2011

Agreed.  I am an American college professor in China, and whenever I hear people saying that China needs to stop controlling its currency, I tell them to be careful what you ask for.   Sometime in this century the Yuan (or some other global/regional currency that replaces it) will replace the dollar as the world's reserve currency.  And that will be a very bad day for America.

[Mike-South Carolina]

09:17 AM on 03/31/2011

I disagree. No single national currency will be strong enough to act as the reserve currency. China will not outgrow the world economy at such a pace. I do think that something will replace the dollar in the next 20 years. What that will be, I have not a clue, but it will be interesting to observe.

[Steven Douglas II]

10:15 AM on 03/31/2011

I completely agree with Amalek, and have thought the same for years. Definitely be careful what you ask for. Most people don't even realize that they are crying out for China to "stop propping up the value of our currency!". Forget the fact that it isn't "our" currency to begin with! (despite its monopolistic position as U.S. "legal tender")

It doesn't have the be the Yuan, or anything else now in existence, for that matter. All it takes is one competing currency that isn't floating, isn't debased, or subject to debasement, and therefore doesn't artificially lose value. That is precisely what the dollar - the last major currency to "go off the gold standard" (read=default on its promise to pay) - once represented, and that is a primary reason it became the world's reserve currency in the first place (IMO).

The dollar's past laurels have been rested on and strained empty for so long that it is now to the point where it is too often seen as the much hated lesser of all evils. But if any country, or group of countries, creates a currency that is pegged to any thing (or combination of things) of intrinsic value, there is no question in my mind that it will be flocked to as the new safe haven.

[Mike-South Carolina]

09:33 AM on 03/31/2011

Mike72, the US acts in the interests of several hundred capitalists. China's economy is not strong enough to set global trade policy, and it may never be, because the US, EU and Japan are and will continue to e strong.The US will continue to use is military and political might to protect these several hundred individuals. No need to worry.

[Mike-South Carolina]

02:40 AM on 03/31/2011

The dollar is nearing the end of its reign as the world's reserve currency but it won't happen for awhile yet. Of course, US policymakers will be far more constrained after it's replaced but the economic consequences for the US won't be dire. It will be fun to watch, in fact, and I predict the world might have to move away from a single, national currency, because no single country will have a hegemonic economy, as did the US after WWII and the British in the 18th Century, that can support a stable reserve currency.

[mike72]

06:52 AM on 03/31/2011

No it won't as long as US Military is far ahead of the rest. This is the core of all cores.

Please note that the world accepts US Dollar as the only viable international trade token NOT BECAUSE they prefer, but that is the Order of the world.

Most likely the world will quitely start trading in small amount among themselves with less US Dollar invovlment. But that is not going to fundamentally change the large international markets where US Dollar dominates and maintain such domination with military and politics.

[Mike-South Carolina]

08:39 AM on 03/31/2011

Of course you raise a valid point. We are discussing political economy, not international economics, and US military power and political interests help determine the outcome. But the economic component is also important and will help determine how the international trade regime evolves. I find these very interesting times.

[mike72]

06:59 AM on 03/31/2011

Let's be frank about it. Any attempts to bring down US Dollar will be face with small wars and arms conflict in the regions. The latest example is Arab world in turmoil. The prior example is East Europe (Yugoslavia) in turmoil.

You might read the news as incidents. The politicians in regions read them as signs of US asserting its Order.

[Mike-South Carolina]

08:51 AM on 03/31/2011

I agree, of course, that the Us has defended, does defend and will continue to defend its economic interests with military power.

[Mike-South Carolina]

09:01 AM on 03/31/2011

I don't however, think US capitalists will defend the dollar irrationally. They will use military power to transition to the new trade regime, maximizing US interests.

[perfectsky]

01:49 AM on 03/31/2011

Thank you Alan, Ben and Timmy for screwing up our economy and democracy. Who trained these three clowns? Why are they so self centered?

[TheNewShadeofBlue]

08:30 AM on 03/31/2011

Ahh...me thinks you protest way too much Alan, Ben and Timmy are far from being the powers you think in terms of the state of the economy and the democracy. Your view is too narrowly focused on the pressures within the United States. You are not looking at the effects Asia (this includes India as well as China), Europe and Russia are having in the serious trade imbalance, coupled with the Middle East artificial hikes in oil prices in spite of supply being at a record high. Precious metals coming from African Countries are primarily bought in dollars. It is a global economy and an interdependent mark with trillions of dollars at stake. There are plenty of white papers out there to read to keep your mind spinning for weeks.

[danusgram]

11:15 PM on 03/30/2011

its starting no matter what you do american corporations your plot to send all of our jobs to China and other places will now have you do the bend over dance. Once American currency is devalued you will have no choice but to briing our products back here for production

[Amalek]

01:04 AM on 03/31/2011

You are on the right track.   Once the dollar is sufficiently beat up, production will return to America, simply because American workers will be cheaper than Chinese workers.   You may get what you want, but it will not include the better earnings and lifestyle of a Chinese worker.

[Mike-South Carolina]

09:22 AM on 03/31/2011

You are arguing "foolishness in return."

[danusgram]

10:01 PM on 03/31/2011

If you are obsessing to live under communist rule leave!

[kwyang]

11:14 PM on 03/30/2011

Hah, much easier solution indeed. Asking the Chinese to let the Yuan float in order to stop buying dollars is like asking you to decapitate yourself in order to save on hat costs.

[Amalek]

12:57 AM on 03/31/2011

If the Yuan were to freely float without substantial Chinese government intervention, the dollar would drop 25% or more against other major currencies, probably more against the yuan.  

There are consequences to that.   All your imported goods, from Chinese manufactured items to foreign cars would go up in price by 25%.  Many U.S. products, like food, would also go up 25% because there would be a surge in exports.   There would be riots at Walmart.

Those who work for U.S. manufacturers would benefit, since U.S. exports would become more competitive.  There would probably be less outsourcing, since U.S. workers would then make about the same as Chinese workers.

[Mister Grumpy]

10:58 PM on 03/30/2011

China is buying up land and buildings, and businesses all over the US.............. While no one can any property in China without their express approval............

[Amalek]

12:58 AM on 03/31/2011

I own a house in China, and I am an American.

[Steven Douglas II]

06:56 AM on 03/31/2011

I do too (in Wuxi, Jiangsu Province), and I am also an American. Most foreigners (outside of China) don't realize that China is not at all the country it used to be, and never was the country most were taught it was. Furthermore, it is ironic to me that I have far more basic freedoms and liberties in China than I ever had here in the good old land of the free and home of the blah, blah, blah, we're number one, etc., etc.,

And consider this: While U.S. politicians pound the debt/consumption/spending/growth tom-toms, China is actively encouraging its citizens to save, save, save...and not Yuan, either, but GOLD and SILVER. My jaw would drop to the floor if I heard anyone in the U.S. government actively imply such a thing, as an official government stance.

[xtiangodloki]

08:53 AM on 03/31/2011

I own some properties in Shanghai, without doubt the best investments I've ever made even if the Chinese real estate market drops by 50% in the coming months (something which I have prepared for for years but have yet to happen).

Home ownership in China though is a bit different than what a lot of people thinks. For one, the Chinese government still owns the land. When you buy a home in China you lease the land from the Chinese government. In my case, the lease is for something like 100 or 150 years. I know I would definitely be dead by the time the lease is over but it will certainly affect the future generation. The building itself built on that leased land on the other hand, belongs to you.

[mamababa2]

07:30 AM on 03/31/2011

Read the 2 posts from Amalek and Steven Douglas II and realize how you've been let down by your educational system and media, Mister Grumpy.

[Tom Hickey]

09:34 PM on 03/30/2011

This from a country that is a known currency manipulator. China has a peg that grossly undervalues its currency. What a bunch of hypocrites.

[ancientuno]

11:40 PM on 03/30/2011

Most countries manipulate their currency from time to time. Even the good ole USA.

[Amalek]

01:06 AM on 03/31/2011

It is in China's interest to keep its currency cheap.  They are looking out for the little guy in America.  If they let their currency appreciate, all that junk at Walmart would become too expensive for the little guy in Arkansas.

[ecrichert12]

04:18 PM on 03/31/2011

no...then the guy in Arkansas would buy stuff in Vietnam and Bangladesh instead of China. It does help China's labor, but only relative to other low cost manufacturers.

[MikeyJaii]

08:32 PM on 03/30/2011

China is not serious about this, if they were then they would level the playing field and not peg it to the dam dollar.

[Amalek]

12:59 AM on 03/31/2011

Oh, they are deadly serious.  The problem they have on their hands is the same problem any drug dealer has.   How do you keep your customer alive and healthy enough to keep buying?

[IThinkthereforeImLiberal]

07:56 PM on 03/30/2011

And so the proverbial karma is staring China right in the face, and it's about time. China has put itself in a catch-22position by not allowing it's currency to float. They keep it tied to the dollar to maintain a competitive currency advantage. To allow it to float now risks hyper-inflation in their currency, cutting off their competitive advantage in manufacturing, and suddenly their working class finds themselves unemployed as global manufacturers see their ROI evaporate, and begin the investment cycle anew in another country.

Keep their currency tied to ours, and they lose net worth as they strive to compete with a
weaker dollar. Wages and real earning power will stagnate, so wage inflation pressures build. Their economy will continue to bleed off jobs as structured costs fluxuate with currency cycles.

Given their population rates, they have real struggles ahead. Not even the Marxist Republicans they have working for them in the House will be able to help them.