China Wants to Transfer Currency Risk Back to the U.S.

In case you (like me) missed this story because it was buried between pages of bullish commentary from Geithner-lovers, it turns out China is still worried about the dollar. Didn’t anyone tell China that was yesterday’s news?

The People’s Bank of China posted an essay on its website suggesting the world adopt a new reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.

Is there any doubt that China is concerned about the US de-basing its currency? Rightly so.

Currently, there is little China can do since dumping US assets would harm Chinese exports as much as it would hurt US interest rates and the dollar. Instead, China has stepped up to the global stage and is initiating critical steps to lead to a more stable monetary system. This was unimaginable just a few years ago. The global trade winds are shifting.

In an arrangement that would rival the scale of Bretton Woods fixed exchange rate regime, China is suggesting that SDRs (Special Drawing Rights), which are now based on a basket of four currencies (the USD, Yen, Euro and Sterling), be broadened to reflect the value of all major currencies.

Essentially, instead of buying USDs or US Treasuries, central banks would hold the broadly-diversified SDRs or SDR-denominated debt on their balance sheets as reserves. The new broader SDR valuation basis would help shelter central bank reserves from exposure to depreciating currencies (often due to monetary mismanagement).

This would change the rules of cross-border financing for governments around the world. Governments that lacked monetary credibility (basically the US, UK, Japan…and any developing nation) would likely be forced to issue SDR denominated debt, internalizing the costs from domestic currency depreciation (since they must convert domestic currency to SDRs to service debt). As with the Asian countries of the 1990s, this effectively transfers currency risk from the debt purchaser to the debt issuer.

Bottom line: China wants to transfer currency risk back to the US government. This is a bold assertion of China’s growing stature in the global financial community.

Comments

[krisandi:]

I dont blame China. US should be responsible for their own demise and I should figure out how to protect myself from the irresponsible of my own respected goverment that I trusted for a long time until now.

Mar 24 01:00 PM

[Bulldawg88:]

The only thing the US has done is to change from a Toxic asset (ie. mortgage) to a toxic currency. We have taken our enormous personal debt issues and now moved them to an even bigger government debt issue. This can only lead to massive inflation and ultimately a collapse of the US citizens net worth. This will also drag down any country who owns our debt. China, are you listening!

Mar 24 03:25 PM

[HaavBline:]

Excellent explanations. The problem is since the US is unlikely to accept this proposal voluntarily, China will NOT be able to transfer the currency risk back to the US unless they resort to a buyer's strike, an unlikely event.

So these are all politically posturing in the midst of intense behind-the-scene negotiations about the amount and the terms of changes in IMF and Chinese (and other cash-rich but powerless-in-IMF countries) contributions to the US-controlled organization.

Mar 24 11:30 PM

[coreopsis:]

The point is that this issue is raised to the front page level -- it is a major structural change that has been suggested or advocated by individuals as far back as Keynes. In the longer-term, it is the only solution to the irresponsible printing press of the US. If and when it is implemented in some form is unclear, but addressing the US is addressing the MAJOR global economic problem today.

Alternatives such a reversion to the gold standard are pure fantasy.

If some kind of global currency plan is not implemented, the likelihood of global warfare (the proverbial WWIII, initiated by the US-military complex under a Republican president) increases tremendously, as global war is of such a scale that almost all economic participants and commodity producers do well (at least at the beginning!) Moreover, the US has an unlimited supply of willing warriors and a willing electorate.

Fire or ice? Don't think so. WWIII will be the ultimate global warming mechanism. Clearly, fire.


On Mar 24 11:30 PM HaavBline wrote:

> Excellent explanations. The problem is since the US is unlikely to
> accept this proposal voluntarily, China will NOT be able to transfer
> the currency risk back to the US unless they resort to a buyer's
> strike, an unlikely event.
>
> So these are all politically posturing in the midst of intense behind-the-scene
> negotiations about the amount and the terms of changes in IMF and
> Chinese (and other cash-rich but powerless-in-IMF countries) contributions
> to the US-controlled organization.

Mar 25 10:17 AM

[Morrison Bo...:]

China is correctly concerned about monetary stability, and its call for a new global reserve currency is excellent. Everyone who uses money is concerned about monetary stability. However, instead of an SDR-based currency, which would be difficult to initiate and maintain and which would be incomprehensible to the people of the world, we should move to a Single Global Currency to be managed by a Global Central Bank within a Global Monetary Union. This next global currency will not be the responsibility of just one country. Such a global currency would be used by all the world's 6.6 billion people. What is needed now is international recognition of those goals, and research and planning to achieve them.
The success of the euro shows that monetary union is the best way to ensure monetary stability. The primary problem with the euro and currencies of other monetary unions is that they still must co-exist within the international multi-currency system itself where the value of those common currencies must still fluctuate in value against each other.
If 16 countries can use the same currency, why not 192?
In addition to eliminating currency risk, the use of a Single Global
Currency would eliminate the current foreign exchange trading expense of $400 billion annually, eliminate current account imbalances, eliminate the need for foreign exchange reserves (now totalling more than $3 trillion); and bring other benefits worth trillions.
The Single Global Currency Assn. (singleglobalcurrency.... promotes the implementation of a Single Global Currency by 2024, the 80th anniversary of the 1944 conference. That’s only 15 years away.
The world is moving toward a Single Global Currency through the creation and expansion and merger of regional monetary unions. Another route is through international monetary conferences proposals and agreements, such as were seen at Bretton Woods.
The challenge now is to reach that goal planfully, as soon as possible with as little cost and as few crises as possible.
See the book, "The Single Global Currency - Common Cents for the World."
Morrison Bonpasse
Single Global Currency Assn.
Newcastle, Maine, United States

Mar 25 12:44 PM

[EUARTE:]

China;s real interest is not interest. It is the destruction of the US to a 2nd rate power. It is worth a lot of money to them. Destroying the US is much cheaper than the war they are planning. They would be even more intelligent if they remembered Napolean, I think, who said that one should leave alone an enemy who destroying itself. Sit back China and all will be yours.

Mar 25 06:13 PM