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Last night China escalated its criticism of U.S. fiscal and monetary policy. The governor of China’s Central Bank, Zhou Xiaochuan, called for a new reserve currency to replace the dollar. FT:

China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund…

Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.

“This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC.

Although Mr Zhou did not mention the US dollar, the essay gave a pointed critique of the current dollar-dominated monetary system.

“The outbreak of the [current] crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system,” Mr Zhou wrote.

In his Sunday interview, Obama noted there’s a limit to U.S. borrowing capacity. How ironic that he dodged the question of how close we are to reaching that limit. If China’s lack of confidence in the dollar is any indication, we’re very close indeed.

This is good news for folks who dislike the Geithner plan…and “stimulus.” China can badger us into balancing our books. If we don’t, they’d be in their right mind to punt Treasurys. And that means higher interest rates, which–as I’ve outlined before–will cancel out any positive impact from stimulus or bailouts.

Before long, the Fed printing press may be our only source of incremental debt finance.

Here is the statement from China’s Central Bank Governor.

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  • That's great, but... who controls the IMF?
    2009 Mar 24 04:23 AM Reply
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  • At the same time of this proposal, China also announced they will continue to buy Treasuries. They know the US is unlikely to agree with Dollar's fate any time soon. Changes, if any, is going to take a long, long time.

    What they do want for the short term is more voting power in the IMF and better assurance from US goverment about their Treasuries and Agency bonds investments beyond mere words.
    2009 Mar 24 09:20 AM Reply
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  • Look, China loves not playing by free market rules. They are, of course, a command economy with a free market interface. So, what hubris they display demanding a world reserve bank run out of the IMF. They are the worst manipulators of currency markets.

    The dollar will gain strength as current account deficits continue to improve over the next year or two. Sorry China, but the US dollar is doing just what it should do...be the whipping boy and savior of the world economy...in it's role as world reserve currency.

    China is a bubble on the end of an American bubble, a command economy, and a currency manipulator. Does anyone believe the G20 or IMF will take this proposal seriously?

    It's intended, as I understand it, to help nations settle current account deficits. Like those the US suffers with who? China...so, thank you China for proposing a system to help the US settle it's account deficits with you. Here's an idea. Let your currency float! Buy US beef, especially since your grasslands are drying up.

    Don't worry about the dollar, there are just as many reasons it won't fall as reasons it will. One thing not mentioned often is our current account deficits are improving.
    2009 Mar 24 09:23 AM Reply
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  • Besides, according to a Bond expert I saw on Bloomberg, if China dumped all it's bonds in a single day the US bond market could absorb it.
    2009 Mar 24 09:24 AM Reply
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  • Something funny is going on here, China badmouths the dollar yet continues to buy US debt. Think about it...they must be up to something. Personally, I think they are buying debt to help keep things somewhat "stable" (whatever you consider stable to be in this environment) in order to plan their EXIT STRATEGY for getting out the of the US dollar.

    I would appreciate everyone's thoughts on this, please reply.
    2009 Mar 24 09:27 AM Reply
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  • China knows what they are doing. If today they were to say that they were going to stop purchasing tresuries then they would probably have a war on their hands within months. They will first establish dominance in the IMF and gain a stronger voice in the G20. When the time is right they will pull the plug on tresuries while finding a way to protect their reserves.


    On Mar 24 09:20 AM HaavBline wrote:

    > At the same time of this proposal, China also announced they will
    > continue to buy Treasuries. They know the US is unlikely to agree
    > with Dollar's fate any time soon. Changes, if any, is going to take
    > a long, long time.
    >
    > What they do want for the short term is more voting power in the
    > IMF and better assurance from US goverment about their Treasuries
    > and Agency bonds investments beyond mere words.
    2009 Mar 24 09:28 AM Reply
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  • The IMF is an outcome of Bretton Woods (1944). After 65 years, it may be appropriate to assess its strengths and weaknesses. That it does not reflect the weight of the so-called BRICs is indisputable, and equally the fact that it has represented the interests of the developed world --- the US above all.

    The interesting fact is that China appears to be supporting the IMF -- in contrast to many developing Asian nations who have a very sour taste in their mouths after the IMF and US driven efforts in the 1997 crisis.


    On Mar 24 09:20 AM HaavBline wrote:


    >
    > What they do want for the short term is more voting power in the
    > IMF
    2009 Mar 24 09:37 AM Reply
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  • I agree with NickyC - this is a long term initiative spearheaded by the Chinese but likely to appeal to more emerging markets in Asia and Latin America to wean themselves off a dependency on the greenback as a store of wealth. The Fed's QE policy always did run the risk of unintended consequences.
    2009 Mar 24 09:39 AM Reply
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  • When various "experts" and "advisors" want to cash out of a falling stock, they talk it up on TV and other media to generate buying interest as they wind down their holdings.

    It seems that China may have learnt the lesson, and the talk of continuing to buy treasuries could be the cover for their gradual and cautious selling of treasuries to buy hard assets instead.
    2009 Mar 24 09:45 AM Reply
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  • The concept of using an existing IMF vehicle as an international "reserve currency" was recently floated by India, Brazil, China, and Russia in a joint communication as a mechanism of establishing greater stability to the international monetary system. Reserve currencies, if owned by a sovereign nation, need to be very well managed and very stable if they are to perform the function the rest of the world needs them to perform. Looking at the state of the US fiscal position, looking at what a mess Japan is in, and looking at all of the issues the Euro has I can forgive other nations for thinking "y'know this isn't quite working correctly". I would also argue that our status as big dog has actually enabled us to get into a much more dire fiscal condition than we would have if there was any realistic check against the US dollar. So, this proposal, which is in its infancy, is worth looking into. It may be beneficial to the US in the long term by forcing greater fiscal discipline on our leaders through market forces.
    2009 Mar 24 09:49 AM Reply
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  • Why doesn't China just let the yuan float? There's your reserve currency.

    Why should they expect someone else to set this up for them and then manage that reserve currency for their benefit?

    When you rely on someone else's currency, the tradeoff is that currency management decisions are made to support the sovereign country, not you. If China doesn't like that, they are free to propose their own currency as the new world reserve. They are, after all, the world's most populous country at nearly four times the size of the US and with significant manufacturing output.

    Oh, I see. China wants to pay its workers in an artificially depressed yuan and receive payment for its exports in an artificially propped up dollar. China just doesn't understand why the US won't play along with this. It's just not fair, is it?
    2009 Mar 24 10:07 AM Reply
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  • It seems dollar bulls get the thumbs down. :) Oh well, someone needs to do some research. Go buy gold, it's down 1% and should be over $1300 by year's end.
    2009 Mar 24 10:10 AM Reply
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  • It seems dollar bulls get the thumbs down. :) Oh well, someone needs to do some research. Go buy gold, it's down 1% and should be over $1300 by year's end.
    2009 Mar 24 10:10 AM Reply
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  • Here's some research from someone who get's it.

    seekingalpha.com/artic...
    2009 Mar 24 10:12 AM Reply
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  • There's other issue besides monetary that will insure that China has an edge over the United States. Being that we have to import a good proportion of our scientist and computer specialists from China/India/Japan/Korea, show's one where Amerika is heading.

    Good Morning, Brazil..........

    On Mar 24 09:23 AM Asbytec wrote:

    > Look, China loves not playing by free market rules. They are, of
    > course, a command economy with a free market interface. So, what
    > hubris they display demanding a world reserve bank run out of the
    > IMF. They are the worst manipulators of currency markets.
    >
    > The dollar will gain strength as current account deficits continue
    > to improve over the next year or two. Sorry China, but the US dollar
    > is doing just what it should do...be the whipping boy and savior
    > of the world economy...in it's role as world reserve currency.<br/>
    >
    > China is a bubble on the end of an American bubble, a command economy,
    > and a currency manipulator. Does anyone believe the G20 or IMF will
    > take this proposal seriously?
    >
    > It's intended, as I understand it, to help nations settle current
    > account deficits. Like those the US suffers with who? China...so,
    > thank you China for proposing a system to help the US settle it's
    > account deficits with you. Here's an idea. Let your currency float!
    > Buy US beef, especially since your grasslands are drying up.
    >
    > Don't worry about the dollar, there are just as many reasons it won't
    > fall as reasons it will. One thing not mentioned often is our current
    > account deficits are improving.
    2009 Mar 24 10:21 AM Reply
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  • Right on Chris, there have been repeated attempts to get China to let it float. They all failed. And the current crisis, remotely, has something to do with unsustainable trade deficits. These need to be settled, and might correct somewhat.

    Salvador, oh you could not be more right. I have argued in other threads/forums that very issue. That's why I support Obama's push to build schools and develop a base of engineers and scientists so we can sell more than CDSs.
    2009 Mar 24 11:01 AM Reply
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  • And I might add, China dug it's own grave by accumulating such a large reserve of dollars rather than repatriating them in free trade. God help the EU if China get's it's hands on the euro...LOL...the 'next' reserve currency.
    2009 Mar 24 11:10 AM Reply
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  • Re ChrisB

    I think China knows that it is not (yet) equipped in terms of capital market infrastructure to host the world's reserve currency.
    Frankly wouldn't it be better to have a global currency that was beyond the control of any one central bank and its printing press?
    2009 Mar 24 11:22 AM Reply
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  • Uh, guys, a renminbe float might not float your boat. Ha! I just came up with that.
    If China floats their currency, they won't be needing to buy all our treasury debt. Then what happens? I guess we could look forward to our myopic state and local governments selling off infrastructure to the Chinese to get hard currency.
    Our government wants China to float their currency about as much as they want to find Bin Laden.
    2009 Mar 24 11:22 AM Reply
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  • We have two parallel currencies in the US right now - the US mint makes gold and silver coins that serve as US tender, and the Fed makes dollars from rags, ink, and electrons.
    Simply fulfill the mandate of the Constitution and mint coins for anyone who brings metal to the mint. No need to abolish or start a new currency, just let them compete. When times are sweet, the metal loses its luster, and in times like these it gets its shine back. Just mint enough to keep up with demand for crying out loud! I'm pretty sure that gold and silver would be accepted anywhere.
    2009 Mar 24 11:30 AM Reply
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