MercoPress. South Atlantic News Agency

China again calls for “super-sovereign” currency to replace US dollar

Beijing is the world’s largest holder of currency reserves in US dollars, 1.95 trillion.

China's central bank has reiterated its call for a new reserve currency to replace the US dollar. The report from the People's Bank of China (PBOC) said a “super-sovereign” currency should take its place.

Central bank chief Zhou Xiaochuan has loudly led calls for the US dollar to be replaced during the financial crisis. The bank report called for more regulation of the countries that issue currencies that underpin the global financial system.

“An international monetary system dominated by a single sovereign currency has intensified the concentration of risk and the spread of the crisis,” the Chinese central bank report said.

The dollar fell after the report was released. The US currency dropped 1% against the euro to 1.4088, and declined 0.8% versus the British pound to 1.6848.

Mr Zhou caused a stir earlier this year when he said the dollar could eventually be replaced as the world's main reserve currency by the Special Drawing Right (SDR), which was created as a unit of account by the IMF in 1969.

The PBOC said in the report that not only should the world adopt the SDR, but that the IMF should be entrusted with managing a portion of its member countries' foreign currency reserves.

“To avoid intrinsic shortcomings in using a sovereign currency as a reserve currency, we need to create an international reserve currency that is divorced from sovereign states and can maintain a stable value over the long term,” the PBOC report said.

It also issued some veiled criticism of the US policies, saying that one of the major issues was that it was difficult to balance the needs of domestic politics with the requirements of being the world's reserve currency.

“The economic development model of debt-based consumption is most difficult to sustain,” the PBOC said.

The Chinese central bank report added speculation that Beijing might diversify its currency reserves, the world’s largest at over 1.95 trillion US dollars. Chinese investors, the biggest foreign owners of US Treasuries, cut holdings by 4.4 billion in April to 763.5 billion after Premier Wen Jiabao expressed concern about the value of dollar assets.

Russian President Dmitry Medvedev recently joined Mr Zhou in saying it was time to consider an alternative benchmark currency for international debt.

But Russian finance minister Alexei Kudrin then said ”it's too early to speak of an alternative”.

At the end of 2008 the US dollar accounted for 64% of global central bank reserves, down from 73% in 2001, according to the IMF in Washington.

IMF First Deputy Managing Director John Lipsky said on June 6 it’s possible to take the “revolutionary” step of making SDRs a reserve currency over time. SDRs were created by the IMF in 1969 to support the Bretton Woods exchange-rate system that collapsed in 1971. They act as a unit of account rather than a currency. The cash is disbursed in proportion to the money each member nation pays into the fund. The value of SDR is based on a basket of currencies, shielding them from swings in a single currency. One SDR is valued at 1.54 US dollars. China is proposing the basket be broadened. The current weighting is: 44% for the US dollar, 34% for the Euro and 11% each for the yen and the pound. It doesn’t include the Yuan.