China Uses G8 Summit as Forum for Currency Debate

By Jason Simpkins
Managing Editor
Money Morning

With a global stage at this week's Group Eight (G8) summit in L'Aquila, Italy, China again took the opportunity to push for global currency reform, arguing that the dollar's position as the world's main reserve currency is a source of instability.

"We need to improve the international monetary system," State Councilor Dai Bingguo said, according to RTE Business. "We should have a better system for reserve currency insurance and regulation, so that we can maintain relative stability of major reserve currencies' exchange rates and promote a diversified rational international reserve currency regime."

The State Councilor spoke on behalf of Chinese President Hu Jintao who cut short his visit to the summit and returned home amid rioting in the Xinjiang region of China.

For months China has been arguing that the U.S. dollar has too great a role in the global economy, and while some analysts believe the greenbacks days are numbered, most economists believe that any significant change is a long way off.

Zhou Xiaochuan, governor of the People's Bank of China, said in March that "a new and widely accepted reserve currency with a stable valuation" to replace the U.S. dollar. Zhou noted that the International Monetary Fund's Special Drawing Right (SDR).

But while world leaders have acknowledged China's position, and might even agree with it, the issue has been brushed aside as policymakers focus on resuscitating the global economy.

"There is a pretty broad consensus with the G8 that this is not the time to experiment with reserve currencies, however attractive it might seem," a source speaking on the condition of anonymity told Reuters.

Additionally, central bankers do not attend G8 meetings. That fact alone limits discussions about currency reform and monetary policy.

Analysts have pointed out that there are few, if any, alternatives to the dollar. The SDR represents a basket of currencies that includes the euro, Japanese yen, pound sterling, and U.S. dollar. The Chinese yuan notably absent.

It is backed only by the good faith and credit of the International Monetary Fund (IMF), has no intrinsic value, and can't be used to purchase anything. That makes it a lukewarm candidate to replace the dollar, and there is no other national currency that would be an obvious improvement over the greenback.

"If [currency reform] becomes an official topic, there will be a knee-jerk reaction, but most countries have the view that it will be hard to abandon the U.S. dollar," Ralph Eliasson, vice president of currency sales at Mizuho Corporate Bank, told Reuters. "I don't know what the alternative would be."

Still, that doesn't leave the dollar entirely in the clear. The greenback is becoming less relevant to global trade as rising powers such as China and Brazil strike deals to do business with their own currencies.

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 in just the past few months.

These deals eliminate the need for China and its trading partners to buy dollars to facilitate cross-border transactions. Rather than a dramatic currency overhaul it is transactions like these that will slowly erode the dollar's relevance, analysts say.

"The financial crisis has focused attention on the dollar's structural weakness, but it's not something that they're going to change," Jane Foley, research director at told Bloomberg. "The dollar's importance will reduce over time, but it's not going to be something which will happen quickly."

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