A report in the Moscow Times that the Kremlin was poised to ask the G20 meeting in London on April 2 to consider creating a supranational reserve currency was met with widespread mirth in the FX market. However, with Zhou Xiaochuan, the governor of the Peoples Bank of China, making a similar call just a week later, it seems that the laughing might prove premature. Zhou has published his arguments in an essay titled Reform the international monetary system on the PBoCs website. And although he does not specifically mention the dollar, it is clear that he is talking about some of the problems that have arisen as a result of the greenbacks use as the international reserve currency.
"The outbreak of the current crisis and its spillover in the world have confronted us with a long-existing but still unanswered question: What kind of international reserve currency do we need to secure global financial stability and facilitate world economic growth, which was one of the purposes for establishing the IMF?" writes Zhou.
Zhou highlights the problem the US faces in meeting its own domestic goals in the face of other countries demand for the dollar. It also highlights the problems China has in managing its huge dollar-denominated reserves. "When a national currency is used in pricing primary commodities, trade settlements and is adopted as a reserve currency globally, efforts of the monetary authority issuing such a currency to address its economic imbalances by adjusting exchange rate would be made in vain, as its currency serves as a benchmark for many other currencies," Zhou reasons, adding that there is a "desirable goal" to reform the international monetary system and "create an international reserve currency that is disconnected from individual nations".
As Zhou points out, the idea of a super-sovereign reserve currency is not new and, to an extent, the creation by the IMF of Special Drawing Rights (SDR) in 1969 was a step towards solving the issue. The SDR is made up of a basket comprising euro, yen, sterling and dollar. Its composition is reviewed every five years; it was last adjusted on January 1 2006.
"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," Zhou argues.
According to Commerzbank Corporates & Markets, the points Zhou raises are valid. "The Feds attempt to trigger inflation (or at least to fight deflation) is motivated by domestic arguments alone. They are in conflict with the interest of non-US holders of dollars," it says.
But whether the SDR can replace the USD remains in doubt. "Zhous suggestion for a solution [increasing the role of SDR as an international reserve currency] shows the dilemma: There are hardly any alternatives to the greenback."