China repeats criticism of dollar dominance
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The People’s Bank of China repeated its call for the world to cut its reliance on small set of reserve currencies on Friday.
In its annual financial stability report, the central bank said it saw serious defects in one currency dominating the global monetary system, a cloaked reference to the dollar.
The PBoC also issued a warning to the US over its loose monetary and fiscal policies, urging closer supervision of those countries that issue the main reserve currencies.
The value of the dollar is of concern to China, given that around 65 to 70 per cent of its $1,954bn in foreign exchange reserves, the world’s largest, are thought to be held in the US currency.
The prospect of global central banks diversifying their huge foreign exchange reserves away from the dollar has long been a source of concern for investors.
Indeed, the dollar index, which tracks its value against a basket of six leading currencies, fell 0.6 per cent to 79.905 as the PBoC renewed a call by central bank governor Zhou Xiaochuan for the creation of a new super-sovereign currency.
In March, Mr Zhou said that role could be filled by the Special Drawing Right, a basket of currencies used by the International Monetary Fund as a unit of account.
The PBoC said the IMF should also manage a portion of its member countries foreign currency reserves.
Stephen Gallo at Schneider Foreign Exchange said the report indicated that there were sings of growing tension mounting between the PBoC’s economic concerns over China’s dollar holdings and the Chinese government’s diplomatic reasons for doing so.
Earlier this month, Tim Geithner, on his first visit to Beijing as US Treasury secretary, went out of his way to assure the Chinese that their large holdings of US dollar assets were secure and that the administration remained committed to a strong dollar and keeping inflation under control.
Mr Geithner said that his confidence in the US dollar was shared by Beijing. ”I believe the Chinese expect the dollar to be the principal reserve currency for a long period of time, as do we,” he said.
“The PBoC are still clearly worried about the longer-term opportunity cost of holding dollars, in as much as it can cite the dollar’s role in the global economy as one of the main reasons for the financial crisis,” said Mr Gallo.
“The Chinese government is still more happy to play to the tune of the US, which sees leaning against the wind in order to protect the dollar as a necessary evil.”
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