(BN) China ‘Super Currency’ Call Shows Dollar Concern

China 'Super Currency' Call Shows Dollar Concern (Update1)
2009-03-24 17:00:12.901 GMT


(Updates with Geithner, Bernanke comments starting in
seventh paragraph.)

By Li Yanping
March 24 (Bloomberg) -- China's call for a new
international reserve currency may signal its concern at the
dollar's weakness and ambitions for a leadership role at next
week's Group of 20 summit, economists said.
Central bank Governor Zhou Xiaochuan yesterday urged the
International Monetary Fund to create a "super-sovereign
reserve currency." The dollar weakened after the Federal
Reserve said it would buy Treasuries and the U.S. government
outlined plans to buy illiquid bank assets
"China is concerned about the potential for a slide in the
dollar as the U.S. attempts to stimulate its economy," said
Mark Williams, a London-based economist at Capital Economics
Ltd. The "rare" sight of a Chinese official attempting to
reframe an international debate may be "a sign of China
becoming more engaged," he said.
Zhou's comments may also signal ambitions for the yuan to
play a bigger global role. The central bank this week signed a
currency swap with Indonesia, adding to agreements since
December with South Korea, Hong Kong, Malaysia and Belarus. It's
also preparing for trade settlement in the Chinese currency with
Hong Kong, Macau and the Association of Southeast Asian Nations.
"There is concern and even frustration among top
policymakers in Beijing about China's high exposure to U.S.
dollar-denominated financial assets," said Brian Jackson,
senior strategist at Royal Bank of Canada in Hong Kong.
Yuan forwards rose the most in three months with traders
betting on appreciation for the first time since September on
speculation that the U.S. policies will weaken the dollar. The
12-month forward rate gained 0.9 percent.

Support for Dollar

U.S. policy makers testifying before lawmakers in
Washington today affirmed their support for the dollar.
Treasury Secretary Timothy Geithner, asked at a House
Financial Services Committee hearing whether he rejected moving
toward a global currency, replied, "I would, yes."
"I would also," said Federal Reserve Chairman Ben S.
Bernanke. The question was asked by Representative Michele
Bachmann, a Minnesota Republican.
Premier Wen Jiabao called on March 13 for the U.S. "to
guarantee the safety of China's assets." China's Treasury
holdings climbed 46 percent in 2008 and now stand at about $740
billion, according to U.S. government data. The nation is the
biggest holder of U.S. debt.

Raising Yuan's Status

China is promoting use of the yuan to smooth currency
volatility and to serve "a long-standing interest" to raise
its status to that of a global reserve currency, said Ben
Simpfendorfer, an economist at Royal Bank of Scotland Group Plc
in Hong Kong. Such moves are not "a knee-jerk response" to the
economic crisis, he said.
"If turning the Chinese yuan into a global reserve
currency sounds ambitious, then encouraging its adoption as a
regional reserve currency is more straightforward," said
Simpfendorfer.
G-20 leaders will gather in London on April 2 to forge a
common response to the financial crisis that has spawned a
global recession. The summit will discuss proposals for reforms
of the International Monetary Fund.

Flexing 'Some Muscle'

The timing of Zhou's proposal is "the latest example of
China's policy of neo-assertiveness in world affairs," said
Glenn Maguire, chief Asia economist at Societe Generale SA in
Hong Kong. "China is starting to flex some muscle and generally
steer the debate in China's own direction."
Zhou's article highlighted the "dilemma" that countries
issuing reserve currencies face in balancing their own monetary-
policy goals with other nations' demand for their money.
The global crisis raised the question of which reserve
currency would secure "global financial stability and
facilitate world economic growth," Zhou said. He proposed
expanding the use of the IMF's Special Drawing Rights, which are
currency units valued against a composite of currencies.
"The basket of currencies forming the basis for SDR
valuation should be expanded to include currencies of all major
economies, and gross domestic product may also be included as a
weighting," said Zhou.
Some economists back his case.
"The world economic landscape has been changed since the
establishment of the SDR 40 years ago," said Ha Jiming, chief
economist at China International Capital Corp. in Hong Kong.
"Specifically, no such reserve currency would make sense
without the yuan being included."

--With reporting by Timothy R. Homan in Washington. Editors:
Paul Panckhurst, David Tweed.

To contact the reporters on this story:
Li Yanping in Beijing at +86-10-6649-7568 or
yli16@bloomberg.net

To contact the editor responsible for this story:
David Tweed in Tokyo at +81-3-3201-2494 or
dtweed@bloomberg.net