China continues to make somewhat disconcerting noises about the US Dollar. They’re disconcerting in the sense that we need Chinca to continue to like our money for the time being.
Last week, it’s premier made some (possibly overblown) comments about hoping the US would commit itself towards preserving the strength of its currency.
Now, FT reports, its central bank Governor Zhou Xiaochuan, has posted an essay calling for the establishment of some kind of global, IMF-based currency. Something that would represent a new reserve currency, but which wouldn’t be linked to any particular national economic interest.
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.
Ultimately, this sounds more theoretical than anything else right now, and it shouldn’t be taken as any definitive sign of China’s attitude towards the Dollar. But if you assume that we’re wholly dependant on China to continue to finance spending, and they keep making comments like this — week after week — you should definitely be a little nervous.
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