Financial Times:

By Jamil Anderlini in Beijing

Published: March 23 2009 12:16 | Last updated: March 24 2009 00:06

China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a 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”.

Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.

“This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC.

Although Mr Zhou did not mention the US dollar, the essay gave a pointed critique of the current dollar-dominated monetary system.

“The outbreak of the [current] crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system,” Mr Zhou wrote.

China has little choice but to hold the bulk of its $2,000bn of foreign exchange reserves in US dollars, and this is unlikely to change in the near future.

To replace the current system, Mr Zhou suggested expanding the role of special drawing rights, which were introduced by the IMF in 1969 to support the Bretton Woods fixed exchange rate regime but became less relevant once that collapsed in the 1970s.

Today, the value of SDRs is based on a basket of four currencies – the US dollar, yen, euro and sterling – and they are used largely as a unit of account by the IMF and some other international organisations.

China’s proposal would expand the basket of currencies forming the basis of SDR valuation to all major economies and set up a settlement system between SDRs and other currencies so they could be used in international trade and financial transactions.

Countries would entrust a portion of their SDR reserves to the IMF to manage collectively on their behalf and SDRs would gradually replace existing reserve currencies.

Mr Zhou said the proposal would require “extraordinary political vision and courage” and acknowledged a debt to John Maynard Keynes, who made a similar suggestion in the 1940s.

First of all, I’m truly sorry the Chinese Central Bank is dissatisfied with the current arrangement, since the Chinese are compelled to buy dollars now that their business of stealing US jobs and counterfeiting US products has fallen off a cliff.

Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.

I suppose Chinese authorities would feel better if the US didn’t take action to save its domestic economy. Last time I checked … in a store … the US was China’s biggest customer.

I’m sorry the Chinese believe there is inflation on the horizon in the US when there is deflation in the US and in China. If the Chinese deflation isn’t visible right at the moment it is because the Chinese business cycle is lagging ours and Chinese apparatchiks are more effective in creating the appearance of inflation (Growth).

“The outbreak of the [current] crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system,” Mr Zhou wrote.

Why don’t the Chinese put their money where their mouths are and trade their own currency? The answer is because the current situation has allowed them to sidestep the issue of trading advantages derived from an undervalued currency. What the Chinese are vulnerable to is speculative attacks on their reserves rather than ‘systemic risks’.

If the Chinese have such a distaste for dollar- risk, why not simply get rid of them? Why not use them to buy US goods? The Chinese could open banks in the US. If the Chinese were to lend here, they might competitively compel American banks to lend. The result would be the purchase of more Chinese goods. The Chinese and US could partner to invest in alternate energy. I can think of a thousand things a couple of trillion dollars could be set to work doing that would improve the lives of many both here and in China. Instead the Chinese whine because the American crooks are currently ahead of the Chinese crooks at the Treasury trough.

It’s laughable the Chinese Central Banker thinks an IMF- ish ‘proxy currency’ will substitute for a national currency. Who will be the lender of last resort for this new, non- currency currency? Would it be the Chinese Central Bank? Or would it be the US Treasury? I’m sure Mr. Zhou would like the US to lend to failed Chinese banks instead of his bank being on the hook.

A big reason the Treasury has ‘invested’ billions in GSE’s such as Fannie Mae is to protect Chinese interests!

How many toxic assets are on the Chinese banks books? Eh?

The Chinese want a reserve currency more to their liking gifted upon them. I would like a new Santa Claus!

The current version is too fat!

The Chinese are annoyed that the US is gaining more in seigniorage then the Treasuries are returning in yield.

The Chinese can complain all they like but there is little alternative to their supporting the dollar by purchasing it. If the dollar declines because of a lack of Chinese support or whatever, they will pay a the gas pump as well as in currency markets.

Oil is currently priced – rather inexpensively – in dollars. A reason for this is the ‘seigniorage tax; customers have to buy dollars then buy petroleum. This buying of dollars helps maintain the relative high value of the dollar and the relative low price of petroleum. A factor in this transaction is the American security regime that is in place in the Middle East and elsewhere. Until the Chinese are able to extend security guarantees in the place of the US, the likelihood that oil will be priced in anything other than dollars is just but nil.