By George Parker and Guy Dinmore in L’Aquila, Krishna Guha in Washington and Justine Lau in Hong Kong
Published: July 9 2009 19:03 | Last updated: July 9 2009 19:03
China has launched its highest-profile criticism of the dominant role of the US dollar as a global reserve currency at a meeting of the world’s biggest economies.
Dai Bingguo, Chinese state councillor, raised the issue on Thursday when he joined the leaders of four other emerging economies for talks with the leaders of the Group of Eight industrialised nations – including US President Barack Obama – in the earthquake-damaged Italian town of L’Aquila.
The remarks, in front of Mr Obama, caused concern among western leaders, some of whom fear that even discussion of long-term currency issues could unsettle markets and undercut economic recovery.
Gordon Brown, Britain’s prime minister, said he did not remember Mr Dai making the remarks. But he said the focus should be on moving the world out of recession.
“We don’t want to give the impression that big change is around the corner and the present arrangements will be destabilised,” said Mr Brown.
”We should have a better system for reserve currency issuance and regulation, so that we can maintain relative stability of major reserve currencies exchange rates and promote a diversified and rational international reserve currency system,” said Mr Dai, according to the Chinese foreign ministry.
While he did not name the dollar, Mr Dai was unequivocal in calling for the world to diversify the reserve currency system and aim at relatively stable exchange rates among leading currencies.
The dollar weakened in subsequent trading, although it was difficult to tell whether this was due to the Chinese remarks or cross-currents in risk appetite and economic data.
Analysts said Mr Dai’s comments – which follow earlier statements by the People’s Bank of China in March – appeared mostly political in nature. While China desires in the long run to move to a more multipolar global financial system, Chinese officials understand that there is no alternative to the dollar in the short term and may not be for many years.
By faulting the dollar Beijing can express its displeasure at US policy and exert leverage over the US in general, including in the broad debate over the future governance of the international financial system.
The challenge also serves as a shot across the bows for the US at a time when China is concerned about giant US government deficits and the Federal Reserve’s unorthodox monetary policy. Beijing wants the US to take seriously its obligation to sustain the value of China’s nearly $2,000bn in US Treasuries.
Separately, Joseph Yam, chief executive of the Hong Kong Monetary Authority, said Hong Kong might consider diversifying more of its US$200bn reserves away from the US dollar.
Mr Yam said he had an “open mind” as to whether the territory would invest its reserves in renminbi-denominated assets.
“There may come a time in the future when we think that a small, modest exposure to the renminbi - notwithstanding it being a non-convertible currency still - may be something that we may pursue. But we don’t have any plans at this moment, any concrete plans,” said Mr Yam.
“A bit of diversification won’t hurt us,” he added.
Copyright The Financial Times Limited 2009