Create a super currency

The idea of creating a new "super sovereign reserve currency" to replace the US dollar, which was recently proposed by China's central bank governor Zhou Xiaochuan, has stirred controversy in the US.

As the leader of China's monetary authority, it is reasonable for Zhou to express concern about the greenback's hegemony as the world's major international reserve currency and suggest reform.

The Obama administration will likely run a big deficit and other nations may take out more foreign exchange reserves to fill the gap. In such a situation, it is natural that bank governors of other nations sympathize with Zhou.

No one believes that the dollar will lose steam immediately. But the grim outlook of the US economy means the greenback could depreciate drastically in the near term.

US historian Paul Kennedy has said that people's concerns about the dollar's prospects may foretell the decline of the US. He said the decrease of US political and economic clout could be a gradual but ruthless process.

In the 18th century, most people involved in international business preferred using the Austrian currency to settle deals. Some 100 years later they switched to the British pound. But in the 20th century the greenback replaced the pound. The change of a country's currency status often comes ahead of change in its power.

The US dollar and treasury bonds account for about 64 percent of the currency reserves of global central banks, compared to 25 percent of the total world GDP that the US creates. Such a disproportion could ultimately prove dangerous and unsustainable.

The fairness and security of the international monetary system have come under a lot of flak recently in the international community and many countries have taken steps to protect their own interests. Some oil exporters, for instance, are choosing to settle deals in euro or their own currencies. Such moves will have an impact on the international monetary system sooner or later. China's proposal to create a new reserve currency is constructive, since it transcends the interests of individual countries for the common good.

Global Times

(China Daily 04/06/2009 page2)