By Jason Simpkins
The People's Bank of China (BOC) reiterated its call for a new global currency to replace the dollar Friday, highlighting Beijing's growing discomfort with the dollar, as well as its determination to win a greater role for its currency, the yuan.
"To avoid the inherent deficiencies of using sovereign currencies for reserves, there's a need to create an international reserve currency that's delinked from sovereign nations," said in its 2008 review, released Friday.
Zhou Xiaochuan, governor of the People's Bank of China, first proposed replacing the dollar as the world's main currency reserve in March in an essay titled "Reform of the International Monetary System."
Zhou pointed to the dollar's unique status as the world's primary currency reserve as a contributing factor to many of the financial crises to occur since the collapse of the Bretton Woods system in 1971.
"The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies," Zhou said. "Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws."
The central bank governor has called for the "re-establishment of a new and widely accepted reserve currency with a stable valuation" to replace the U.S. dollar – a credit-based national currency. Zhou noted that the International Monetary Fund's Special Drawing Right (SDR) should be given special consideration.
China reiterated its call to oust the dollar ahead of the G20 Summit in April and again after a June 16 meeting with representatives from Brazil, Russia, and India. China's now routine calls to reform the global currency system show the world's third largest economy is determined to use the financial crisis to win greater acceptance of its own currency, the yuan.
Following its meeting with the other members of the so-called "BRIC" nations, China and Brazil began exploring the possibility of a currency swap, which would let them trade more freely.
China has signed about $95 billion (695 billion yuan) of currency deals with Argentina, Malaysia, South Korea, Hong Kong, Belarus, and Indonesia over the past few months.
These deals eliminate the need for China and its trading partners to buy dollars to facilitate cross-border transactions. It also gives China's currency a more prominent role in the global economy, and moves the yuan one step closer to supplanting the dollar as the world's main reserve currency.
"For Westerners who are struggling to come to terms with the notion of a disarrayed dollar, the thought of oil, gold or other commodities being priced in yuan instead of dollars has to seem about as likely as having another country put a man on the moon," said Money Morning Investment Director Keith Fitz-Gerald. "But the Chinese yuan is already well on its way to becoming that globally accepted standard unit of exchange and the proverbial genie, as they say, is out of the bottle."
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