The UN, China Want to Ditch the Dollar

It's kind of funny how the IMF (International Monetary Fund) has gone from irrelevance to center stage in just a matter of months. Following quickly on the heels of last week's news that the Federal Reserve plans to print up another trillion dollars came this announcement that a UN panel wants to replace the greenback with a shared basket of currencies.

Monday, according to this Reuters report (hat tip MA), China loudly seconded the plan.
Earlier Monday, China’s central bank governor, Zhou Xiaochuan, offered a bold proposal to overhaul the global monetary system and replace the dollar with the IMF SDR (Special Drawing Right).

The SDR, an international reserve asset created by the IMF in 1969 but little used since that time, has the potential to act as a super-sovereign reserve currency, eliminating risks inherent in any single currency used for that purpose.

In a speech that took the unusual step of being issued in both Chinese and English, Mr. Zhou was careful not to mention any "specific" currency that the SDR might replace.

Mr. Zhou commented:

The outbreak of the [credit] crisis and its spillover to the entire world reflected the … systemic risks in the existing international monetary system.

The world needs a reserve currency that is disconnected from individual nations and is able to remain stable in the long run.

The role of the SDR has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system.

The price is becoming increasingly high, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.

It appears that the days of exorbitant privilege may be numbered.

In addition Mr. Zhou also proposed the following steps:

-- Set up a settlement system with other currencies so their SDR can be widely accepted in global trade and financial transactions. Currently, the SDR is largely an artificial unit used by governments and international institutions.

-- Actively promote the use of the SDR in trade, commodities pricing, investment and corporate bookkeeping.

-- Create financial assets denominated in SDRs to increase its appeal. The introduction of SDR-denominated securities, which is being studied by the IMF, would be a good start, Zhou said.

-- Expand the basket of currencies forming the basis for valuing the SDR to include currencies of all major economies.

That upcoming G20 meeting might get a little testy...

Comments

[Mad Hedge F...:]

Can you blame them? Chinese president Hu Jintao has expressed “concern” about the safety of his country’s $696 billion investment in US Treasury bonds. What he is not telling you is that he is even more “concerned” about the hundreds of billions of Fannie Mae, Freddie Mac, GMAC, and other agency debt, which are either now untradeable, or have gone into the toilet. And “concerned” he should be. Not only is some of the paper China owns now worthless, there is a 50% devaluation of the dollar in the cards which is the guaranteed result of current US government printing press policies. One of the great luxuries of running a dictatorship is that you can skip mark-to-market accounting. The government entities that own this garbage are carrying it on their books at par, because they intend to hold it to maturity. If China used mark-to-market they would have plunged into another civil war by now. Expect to hear more “concerns” from Japan, Singapore, and the sovereign wealth funds that are in the same boat.

Mar 23 06:08 PM

[Bad Dog:]

This is the next step in the emergence of China into preeminence on the world stage. From now on China will be much more assertive and active in remaking the world economy. We are just now beginning to see the stirrings of the Chinese century. The American century is over. Not that America will cease to be a great power, but it now has to share the stage with the part that is responsible for 1 in 6 people living on this planet. The real devaluation in the USD will come, not from government printing presses, but for the US dollars - about $2 trillion - held by foreigners as they make their way back home.

Mar 23 06:15 PM

[CJJ:]

Yea, China will ditch their $'s for their weak ass yuan. I love how the $ needs to be strong but you guys stroke China and the undervalued yuan. Give me a break. They're running surpluses, ya ya ya.
Unless you're willing and on your way to moving to China, spare me the China stroke.
How exactly do all the countries of the world that are not the reserve currencies survive? At my last check and forgive me for being factual, that was ALL COUNTRIES outside of the US.

Since the furor and bitching and moaning is less outside the US than in the US over this "ongoing depression"(if that's so, its the best depression ever)..I wonder why a global currency or move away from the dollar as a bad thing.

China is the last country that should want this to occur. Immediately kills their undervalued yuan BS. But hey, whatever.

Mar 23 07:34 PM

[Al-USA:]

Interesting...

Mar 23 08:24 PM

[Prudent Man...:]

The irony is that China is more concerned with the value than the dollar than the U.S. government. Maybe Geithner, Obama and Bernanke should be responsible and ask our creditors, who seem more cognizant of the ramifications, their views on our policies because they have skin in the game more so than our politicians and policy makers.

I propose that we pay all in Congress and the Administration the minimum wage with a bonus pot at the end of the year consisting of how much they reduced the budget from the previous year. They could fight it out at the end of the year over who gets how much. Of course, they get most of their cash and goodies by graft.

Mar 23 08:45 PM

[DougM:]

China is running a very old-fashioned merchantilist policy that is ultimately self-defeating. They can't have it both ways. In the long run, they'll have to run a more balanced economy vis-a-vis the rest of the world.

Mar 23 09:37 PM

[KIT:]

China does not buy treasuries to make 3% or 8% return. They buy treasuries to recycle dollars back to Americans so they can buy Chinas cheap labor. Employment in China is far more important than losses to devaluation of any currency or investment. Money is the paper representation of labor. Unemployed labor is the mob with torches outside the government offices ready to burn it down

Mar 23 11:05 PM

[Gale:]

Can you imagine what advantage you would have:
if the whole world use a currency that only you can print out of thin air and all the rest of the world have to work their ass off to earn it?

Mar 23 11:55 PM

[Michael_Cohen:]

The little ponzi scheme we have going with China has to end eventually. They can't expect us to run record deficits and keep a strong dollar.

Our ship is going down and we're going to drag them with us.

Mar 24 02:05 AM

[johngonole:]

Oil is traded in dollars. Rising demand for oils has helped strengthen our currency. History of the poor performance of other currencies has also helped our currency. Problem is the amount of new currency is sky rocketing. This is going to cause hyperinflation and further mal-investment.

China and others see the future and are trying the best they can no limit the damage by planning for a future world currency. The problem they have is that it will take far too long. By that time the US currency will be decimated. Maybe only halved but decimated is possible

Mar 24 02:24 AM

[brainlara:]

its excellent and interesting blog.

Mar 24 03:18 AM

[coreopsis:]

Give this guy a Nobel in economics. The US has dominated the world financial and economic system since 1945. But China's economy is the one that is 'unbalanced'. Hell, the Yanks were just doing fine until China started unbalancing its economy. Sad, Doug, isn't it? Tough being the victim.


On Mar 23 09:37 PM DougM wrote:

> China is running a very old-fashioned merchantilist policy that is
> ultimately self-defeating. They can't have it both ways. In the long
> run, they'll have to run a more balanced economy vis-a-vis the rest
> of the world.

Mar 24 09:42 AM

[coreopsis:]

Have you ever been to China or are you possibly Taiwanese?

There are billions of people just waiting to torch government offices. That clearly is the #1 observation of most people after they return from China. Oh, the flames shall lick the guilty...


On Mar 23 11:05 PM KIT wrote:

> China does not buy treasuries to make 3% or 8% return. They buy treasuries
> to recycle dollars back to Americans so they can buy Chinas cheap
> labor. Employment in China is far more important than losses to devaluation
> of any currency or investment. Money is the paper representation
> of labor. Unemployed labor is the mob with torches outside the government
> offices ready to burn it down

Mar 24 09:44 AM

[eyetaliano:]

performance-based bonus. Now that's an idea.


On Mar 23 08:45 PM Prudent Man CFA wrote:

> The irony is that China is more concerned with the value than the
> dollar than the U.S. government. Maybe Geithner, Obama and Bernanke
> should be responsible and ask our creditors, who seem more cognizant
> of the ramifications, their views on our policies because they
> have skin in the game more so than our politicians and policy makers.
>
>
> I propose that we pay all in Congress and the Administration the
> minimum wage with a bonus pot at the end of the year consisting of
> how much they reduced the budget from the previous year. They could
> fight it out at the end of the year over who gets how much. Of course,
> they get most of their cash and goodies by graft.

Mar 24 10:05 AM

[bricki:]

China is finding out that you can't burn the candle at both ends. Maintaining an artificially low exchange rate to obtain trade dollars works in the short run, but sooner or later the nation you are trading with is going to have problems maintaining the value of their currency.

More poignantly there is a basic fact of economic life - you cannot bring a nation of 1 billion to western living standards by maintaining a trade imbalance with a nation that has a population of 300 million. The numbers are just not there.

The SDR isn't going to help China either. It is based on a basket of fiat currencies, none of which is really that much stronger (if at all in fact) than the dollar.

It is all a futile effort to suppress the real value of the Yuan and maintain the trade imbalances need to fuel China's economic growth. Sooner or later real capitalism will have to come to China; the sort of capitalism where worker's wages increase because of investment of capital into the means of production. Right now Chinese worker's wages are suppressed because of the artificially low value of the Yuan. That cannot last forever. Or even much longer.

Trees do not grow to the sky, especially if they are rooted in sand.

Mar 24 10:14 AM

[Chris B:]

1) China builds their entire economic system on the basis of paying their workers in a cheap yuan and getting payment in strong dollars. Then they act like the US is being irresponsible for running deficits that threaten the dollar, even as the Chinese are the ones buying this debt by the truckload even at negative real interest rates! This finger pointing on both sides is ridiculous. A change in the status quo would involve the yuan appreciating, which would drop exports to the US and result in high US inflation. Is this really in China's intrests?

2) If China wants a new global reserve currency - one that is managed to support their interests - they are welcome to let the yuan float and to let it become the new global reserve. After all, they will soon control most of the world's supply of manufactured goods and demand for resources. Plus they are the world's most populous country - over 3X the population of the US. Why doesn't China just do this? Because the rising yuan would put too many people out of work by depressing exports.

Conclusion: Their criticism is hollow and their proposed solutions unworkable. The world is changing and China is desperately trying to find a way to continue the mercantalist policies of the past.

Mar 24 10:23 AM

[Moon Kil Woong:]

Let me get this straight. China which engages in currency manipulation is mad at the US for currency manipulation (specifically artificially depreciating it).

They propose we make a derivative (money representing hard assets like gold), of a derivative (a basket of money) with currencies that may be artificially manipulated by each respective nation. Do they honestly think this will solve everything?

Making derivatives of derivatives is exactly the type of ridiculousness that ruined the mortgage market. Every step away from reality leads you toward a completely artificial reality that fails to accurately reflect the real world.

Mar 24 10:25 AM

[Assouli:]

The new world order
How China sees the world

Mar 19th 2009
From The Economist print edition
And how the world should see China

IT IS an ill wind that blows no one any good. For many in China even the buffeting by the gale that has hit the global economy has a bracing message. The rise of China over the past three decades has been astonishing. But it has lacked the one feature it needed fully to satisfy the ultranationalist fringe: an accompanying decline of the West. Now capitalism is in a funk in its heartlands. Europe and Japan, embroiled in the deepest post-war recession, are barely worth consideration as rivals. America, the superpower, has passed its peak. Although in public China’s leaders eschew triumphalism, there is a sense in Beijing that the reassertion of the Middle Kingdom’s global ascendancy is at hand (see article).

China’s prime minister, Wen Jiabao, no longer sticks to the script that China is a humble player in world affairs that wants to focus on its own economic development. He talks of China as a “great power” and worries about America’s profligate spending endangering his $1 trillion nest egg there. Incautious remarks by the new American treasury secretary about China manipulating its currency were dismissed as ridiculous; a duly penitent Hillary Clinton was welcomed in Beijing, but as an equal. This month saw an apparent attempt to engineer a low-level naval confrontation with an American spy ship in the South China Sea. Yet at least the Americans get noticed. Europe, that speck on the horizon, is ignored: an EU summit was cancelled and France is still blacklisted because Nicolas Sarkozy dared to meet the Dalai Lama.

Already a big idea has spread far beyond China: that geopolitics is now a bipolar affair, with America and China the only two that matter. Thus in London next month the real business will not be the G20 meeting but the “G2” summit between Presidents Barack Obama and Hu Jintao. This not only worries the Europeans, who, having got rid of George Bush’s unipolar politics, have no wish to see it replaced by a Pacific duopoly, and the Japanese, who have long been paranoid about their rivals in Asia. It also seems to be having an effect in Washington, where Congress’s fascination with America’s nearest rival risks acquiring a protectionist edge.
Reds under the bed

Before panic spreads, it is worth noting that China’s new assertiveness reflects weakness as well as strength. This remains a poor country facing, in Mr Wen’s words, its most difficult year of the new century. The latest wild guess at how many jobs have already been lost—20m—hints at the scale of the problem. The World Bank has cut its forecast for China’s growth this year to 6.5%. That is robust compared with almost anywhere else, but to many Chinese, used to double-digit rates, it will feel like a recession. Already there are tens of thousands of protests each year: from those robbed of their land for development; from laid-off workers; from those suffering the side-effects of environmental despoliation. Even if China magically achieves its official 8% target, the grievances will worsen.

Far from oozing self-confidence, China is witnessing a fierce debate both about its economic system and the sort of great power it wants to be—and it is a debate the government does not like. This year the regime curtailed even the perfunctory annual meeting of its parliament, the National People’s Congress (NPC), preferring to confine discussion to back-rooms and obscure internet forums. Liberals calling for greater openness are being dealt with in the time-honoured repressive fashion. But China’s leaders also face rumblings of discontent from leftist nationalists, who see the downturn as a chance to halt market-oriented reforms at home, and for China to assert itself more stridently abroad. An angry China can veer into xenophobia, but not all the nationalist left’s causes are so dangerous: one is for the better public services and social-safety net the country sorely needs.

So China is in a more precarious situation than many Westerners think. The world is not bipolar and may never become so. The EU, for all its faults, is the world’s biggest economy. India’s population will overtake China’s. But that does not obscure the fact that China’s relative power is plainly growing—and both the West and China itself need to adjust to this.

For Mr Obama, this means pulling off a difficult balancing act. In the longer term, if he has not managed to seduce China (and for that matter India and Brazil) more firmly into the liberal multilateral system by the time he leaves office, then historians may judge him a failure. In the short term he needs to hold China to its promises and to scold it for its lapses: Mrs Clinton should have taken it to task over Tibet and human rights when she was there. The Bush administration made much of the idea of welcoming China as a “responsible stakeholder” in the international system. The G20 is a chance to give China a bigger stake in global decision-making than was available in the small clubs of the G7 and G8. But it is also a chance for China to show it can exercise its new influence responsibly.
The bill for the great Chinese takeaway

China’s record as a citizen of the world is strikingly threadbare. On a host of issues from Iran to Sudan, it has used its main geopolitical asset, its permanent seat on the United Nations Security Council, to obstruct progress, hiding behind the excuse that it does not want to intervene in other countries’ affairs. That, sadly, will take time to change. But on the more immediate issue at hand, the world economy, there is room for action.

Over the past quarter-century no country has gained more from globalisation than China. Hundreds of millions of its people have been dragged out of subsistence into the middle class. China has been a grumpy taker in this process. It helped derail the latest round of world trade talks. The G20 meeting offers it a chance to show a change of heart. In particular, it is being asked to bolster the IMF’s resources so that the fund can rescue crisis-hit countries in places like eastern Europe. Some in Beijing would prefer to ignore the IMF, since it might help ex-communist countries that have developed “an anti-China mentality”. Rising above such cavilling and paying up would be a small step in itself. But it would be a sign that the Middle Kingdom has understood what it is to be a great power.

Mar 24 10:38 AM

[Alex Filonov:]

Who actually cares what China thinks about dollar? They sell their stuff for dollars and euros, right?

World currencies are not set by governments. That's their main difference from national currencies. World currencies are established by markets. If most markets decide that something else than dollar would be world currency, so be it. So far, markets don't want to move from dollar.

UN is irrelevant to economy.

Mar 24 10:59 AM

[Hot Richard:]

Hu Jintao doesn't blink without a plan. I'm impressed with how China has the US talking about the $700 billion while China uses their free hand to work interests in commodities, India, SE Asia, South America, Africa, and Russia. Most Americans are in denial and refuse to admit they aren't in a position of power with China (hint: debt approaching $10 trillion is a clue). Again, China has billions of people (much closer than the US) now ready to consume their products. America has debt (and soon...more credit!).

You also have to know that Obama/Bernanke completely understand the true cost of helicopter rides. The cost will be a worthless dollar (and associated worthless US savings). It's a reset button, but they are not hitting it by mistake. Watch as H.Clinton follows the script on frequent visits to China...but she will not "seduce China".

Just get yourself out of dollars.

Hot Richard is long gold, oil, bags of rice, and solar panels. I'm bullish on the buying opportunities in good Chinese companies.

Mar 24 11:11 AM

[Bo Peng:]

The next shoe to drop is China & Russia settling a trade with IMF SDR, even if it's a small trade. This could be the last snowflake that starts an avalanche.

The upcoming G20 may actually be interesting, judging by the posturing and positioning so far.

Mar 24 12:19 PM

[Jason Rines...:]

As wise as your are Mad Hedge Fund, you missed the strategy of China/Russo alliance. They did state there intentions as early as 1993. What are those intentions? To capture what they view as the ultimate prize: The international monetary peg. The new discussion should be called 'The Clash of The Titans'. This critical factor is being missed by almost all around the globe except for the very few and Washington is now catching on but the time to act firmly to retain the peg is over. I don't root for any sides between the U.S., E.U. and China. Why? Because whatever side you choose you will be considered fodder for the titans.


On Mar 23 06:08 PM The Mad Hedge Fund Trader wrote:

> Can you blame them? Chinese president Hu Jintao has expressed “concern”
> about the safety of his country’s $696 billion investment in US Treasury
> bonds. What he is not telling you is that he is even more “concerned”
> about the hundreds of billions of Fannie Mae, Freddie Mac, GMAC,
> and other agency debt, which are either now untradeable, or have
> gone into the toilet. And “concerned” he should be. Not only is some
> of the paper China owns now worthless, there is a 50% devaluation
> of the dollar in the cards which is the guaranteed result of current
> US government printing press policies. One of the great luxuries
> of running a dictatorship is that you can skip mark-to-market accounting.
> The government entities that own this garbage are carrying it on
> their books at par, because they intend to hold it to maturity. If
> China used mark-to-market they would have plunged into another civil
> war by now. Expect to hear more “concerns” from Japan, Singapore,
> and the sovereign wealth funds that are in the same boat.

Mar 24 01:09 PM

[Greg Parker:]

An interesting article. Another thought to consider is this.

With the Chinese government having the world's largest holding of US treasuries and continually expressing their discontent over the devaluing nature of the US government's activities toward their investment, and the Federal Reserve announcing plans to purchase long term treasuries in the days to come. I believe it is quite likely that they will purchase some of those directly from China as a means of appeasing them a little, rather than buying just freshly created ones. This also reduces the inflationary risk of their actions. This in turn carries with it the implication that the Chinese will not be purchasing many more new treasuries from the US in the near future, heightening the risk of a collapse in the treasury market.

mostlymoneymusings.blo...

Disclosure - At the time of writing the author held a position in TBT, and is bullish on oil, gold and commodities.

Mar 24 08:39 PM

[coreopsis:]

You are truly clueless. Unless you've either worked for a supranational organization (IMF), Wall Street, or have a PhD in economics, this subject is not for you. Way too complicated for you to oversimply like this.

Everything is a derivative of economic value, so you better get used to it. That what economics is about.


On Mar 24 10:25 AM Moon Kil Woong wrote:

> Let me get this straight. China which engages in currency manipulation
> is mad at the US for currency manipulation (specifically artificially
> depreciating it).
>
> They propose we make a derivative (money representing hard assets
> like gold), of a derivative (a basket of money) with currencies that
> may be artificially manipulated by each respective nation. Do they
> honestly think this will solve everything?
>
> Making derivatives of derivatives is exactly the type of ridiculousness
> that ruined the mortgage market. Every step away from reality leads
> you toward a completely artificial reality that fails to accurately
> reflect the real world.

Mar 24 09:55 PM

[coreopsis:]

Clueless, every word of your post.


On Mar 24 10:59 AM Alex Filonov wrote:

> Who actually cares what China thinks about dollar?

Like everyone, from the Russians to the Americans.

> World currencies are not set by governments. World currencies are established by markets.

Haha.
> If most markets decide that something else than dollar would be world
> currency, so be it.

Haha. You haven't got the faintest clue how international business or a simple trade transaction is conducted. Please, g.l.
>
>
> UN is irrelevant to economy.

Mar 24 09:58 PM

[coreopsis:]

Clueless.


On Mar 24 10:14 AM bricki wrote:

> China is finding out that you can't burn the candle at both ends.
> Maintaining an artificially low exchange rate to obtain trade dollars
> works in the short run, but sooner or later the nation you are trading
> with is going to have problems maintaining the value of their currency.

Guess what? I trade with many nations, so what does your tragically simple model say?
> More poignantly there is a basic fact of economic life - you cannot
> bring a nation of 1 billion to western living standards by maintaining
> a trade imbalance with a nation that has a population of 300 million.
> The numbers are just not there.

OK. So what if I trade with Russia, the EU, Australia, Brazil, Japan, Korea, South Africa....etc. I guess that would be more than 300 million (but check my math).
> The SDR isn't going to help China either. It is based on a basket
> of fiat currencies, none of which is really that much stronger (if
> at all in fact) than the dollar.

Ever hear of the expression 'the whole is greater than the sum of the parts'? Ponder it over a beer.
> It is all a futile effort to suppress the real value of the Yuan
> and maintain the trade imbalances need to fuel China's economic growth.

Oh, so that's it. It's all price-based, I see. Oh, well.
> Sooner or later real capitalism will have to come to China; the sort
> of capitalism where worker's wages increase because of investment
> of capital into the means of production.

You're very right, there's been no increase in the average Chinese worker's wages since 1952.
Right now Chinese worker's
> wages are suppressed because of the artificially low value of the
> Yuan.

Are you a Chinese worker with suppressed wages? Thanks for the inside scoop, bud.

> Trees do not grow to the sky, especially if they are rooted in sand.

And TRIX are for rabbits.
>
>

Mar 24 10:04 PM