The central bank governor's idea of replacing the US dollar with a super-sovereign reserve currency may take decades to realize, even if it is possible, economists said.
Zhou Xiaochuan, governor of the People's Bank of China, said in an article that it was necessary to create a 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".
Zhou suggested that the Special Drawing Rights (SDRs) could be used as a super-sovereign reserve currency. His comments echoed Russia's latest proposal for the creation of a new reserve currency issued by international financial institutions.
Russia said the idea would be supported by fellow BRIC nations - Brazil, India and China - as well as South Korea and South Africa.
The IMF created the SDRs in 1969 to support the Bretton Woods' fixed exchange rate system. Its value is based on a basket of international currencies made up of the dollar, euro, Japanese yen and British pound.
"It is necessary to end the dollar's dominant status with a super-sovereign reserve currency, especially since its future looks much more unstable," said Zhang Xiaojing, an economist with the Chinese Academy of Social Sciences. "But it would take years or decades to work out the details and gain acceptance for its use."
Zhou said "a super-sovereign reserve currency would not only eliminate the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity."
Analysts said the US government's recent bailout efforts, which would lead to massive money creation, is likely to fan inflation. More importantly, it may put greater pressure on the US dollar to depreciate, which would bring significant losses to its holders.
China now has US$1.95 trillion in foreign exchange reserves, the largest in the world, and analysts estimate that US dollar denominated assets, including US Treasuries and bonds, account for about 70 percent of those reserves.
Earlier this month, Premier Wen Jiabao said he was worried about the safety of China's assets in the US. Some analysts said China would reduce its holdings of US Treasury notes gradually.
"The idea of a super-sovereign reserve currency is unlikely to win over most countries in the short run," said Cao Yuanzheng, chief economist with Bank of China International Holdings Limited. "The idea of using SDR as a reserve currency has been there for 30 years but it is still only on paper."
Analysts said the idea would face resistance from the US, which relied on the dollar's dominating status to maintain both the budget and trade deficits.
Australian Prime Minister Kevin Rudd said on Monday the US dollar's position as a key reserve currency was not at risk, despite China's call for an overhaul of the global monetary system, according to Reuters.
(China Daily March 25, 2009)
