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.
