No dethroning dollar despite risks: China FX official
The global financial crisis has tarnished the dollar and will prompt reserve managers to diversify, but the U.S. currency will retain its dominant international role, a senior Chinese official said in remarks published on Wednesday.
Guan Tao from the State Administration of Foreign Exchange, which invests China’s $1.95 trillion in currency reserves, likened the risk of U.S. inflation and dollar depreciation to “blocked dams” that threatened the stability of the global monetary system in the medium term.
The phrase, ‘My dollar, your problem’ vividly captures the capacity of the United States to exploit the current international monetary system to palm off this crisis,” he said.
But Guan said diversification brought the risk of greater turbulence in non-dollar currencies.
“In reserve baskets, the more currencies is not necessarily the better,” Guan wrote in International Economic Review, a Chinese-language magazine issued by the Chinese Academy of Social Sciences, a leading think-tank.
“In the future, the U.S. dollar may continue to dominate the international currency system,” added Guan who was writing in a personal capacity.
China recently disclosed that it had quietly increased its holdings of gold by three-quarters since 2003 to 1,054 tonnes.
But Guan said that while gold had shot up in value, it was a commodity with little practical value and scant prospect of replacing the dollar as a global monetary anchor.
Guan, a deputy head of SAFE’s general affairs department, said the financial crisis had “struck a heavy blow to the international prestige of the dollar, and global foreign exchange and asset allocation will become more diversified emergency cash loans.”
But he said Washington was likely to learn its lessons from the crisis and the U.S. economy had every prospect of bouncing back with renewed vigor.
Indeed, although the turmoil had exposed America’s inadequate savings, other countries hoped the United States would press ahead with expansionary policies to stimulate a recovery, “allowing the United States to continue performing the role of the world’s ultimate consumer.”
NOT BRIGHT
Guan played down a recent proposal by central bank governor Zhou Xiaochuan for the International Monetary Fund’s Special Drawing Right to eventually displace the dollar as the dominant global reserve currency.
A super-sovereign currency would require the backing of the United States, which is cool to the idea; and because of its institutional underpinnings the creditworthiness of the new currency may not be superior to the dollar’s, he said.
“What’s more, there are numerous technical implementation problems, so its outlook is not bright,” Guan wrote.
Echoing the arguments Zhou made when advocating the SDR, Guan said China wanted countries that issue reserve currencies, especially the United States, to “shoulder their due international responsibilities” when setting economic policy.
Filed under: money by Wolf