China calls for a new global reserve currency
Updated
Calls by China for the US dollar to be replaced as the world's major reserve currency have been largely dismissed. But the governor of China's central bank says weaknesses in the international financial system are making the global recession worse.
Presenter: Karon Snowdon, finance correspondent
Speaker: Mervyn Lewis, professor of finance and banking, University of South Australia; Timothy Geithner, US Treasury Secretary; Richard Jerram, economist, Macquarie Securities
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KARON SNOWDON: Whatever else the two countries might agree on it seems currency issues won't be one of them. Each blames the other for the so-called massive imbalances in the global financial system. The US has constantly accused China of keeping its own currency at low values to benefit China's exporters and which has also allowed the vast accumulation of foreign reserves. China is critical of US interest rate policies and now the Governor of the Central Bank has attacked the dollar. He says it needs to be replaced as the world's major reserve currency. A reserve currency is one that governments or central banks keep to pay foreign bills or to influence exchange rates. Most international trade is done in US dollars and as a reserve it outweighs all others. Professor of Finance at the University of South Australia, Mervyn Lewis, says the Chinese do have some genuine concerns.
MERVYN LEWIS: The first concern of the Chinese is that they're locked into holding quite a lot of dollars and those dollars can fall in value. The second dilemma for the Chinese is that there's no real alternative.
KARON SNOWDON: But the suggestion that the dollar could be easily replaced or replaced at all...
MERVYN LEWIS: I think it's very unlikely. There were many such ideas in the 1960s in a period when the US was issuing a lot of dollars, in that case because of the Vietnam War, and none of it came to anything.
KARON SNOWDON: This idea has been welcomed reportedly by the IMF, which of course is seeing a bigger role for itself in something like that.
MERVYN LEWIS: Exactly. Yes, I mean, there are territorial interests involved here.
KARON SNOWDON: The problem facing the Chinese Government is that it holds almost $2 trillion in foreign reserves and has a huge pile of dollar assets, mostly US Government bonds. So China is worried, as Premier Wen Jiabao said a few weeks ago, that their value will fall as a result of US Government policies to fight the recession. So US Treasury Secretary Timothy Geithner was quick to defend the dollar and US policies against the Central Bank Governor's attack.
TIMOTHY GEITHNER: I think the dollar remains the world's dominant reserve currency. I think that's likely to continue for a long period of time and as a country we'll do what's necessary to ensure we're sustaining confidence in our financial markets and our productive capacity in this economy and the long-term fundamentals.
KARON SNOWDON: Watching with interest from Macquarie Bank in Tokyo, economist Richard Jerram sees no change ahead.
RICHARD JERRAM: It seems impractical to me to promote a different world currency because it's just a reflection of the depth of the country's capital markets and the US capital market's just so much deeper than anywhere else. I think it's very natural that they fulfil the role of a world currency. Similarly, it's natural that the Chinese are uncomfortable about that but they always have the option of seeking other countries to invest in. I think, as I say, the problem is that most capital markets aren't deep enough for them to invest. I think you could also argue if you're worried about where to invest your surplus then the sensible thing to do would be not to run a surplus, to stimulate the domestic economy aggressively enough that the surplus fades away. So, maybe they should be looking at themselves as well as looking at the US on this sight.
KARON SNOWDON: Finance Professor Mervyn Lewis says while there might be some merit in shifting one currency's dominance, too many hurdles remain.
MERVYN LEWIS: Well, I think that there's a need. The question is how to bring it about. It's like the old story of there's a need for the mice to bell the cat, but who's going to actually do it? There's the problem of how you actually bring it about because if it involves any loss of national sovereignty, you can kiss goodbye to the idea straight away.
