China: Time For Reserve Currency Debate

Wednesday, July 1, 2009 1:44 PM

China has asked to debate proposals for a new global reserve currency at next week's Group of Eight summit in Italy and the issue could be referred to briefly in the summit statement, G8 sources said on Wednesday.

One G8 source who was involved in the negotiations said China made the request during preparatory talks about a joint statement to be issued on the second day of the summit in L'Aquila by the G8 plus the G5 (Brazil, India, China, Mexico and South Africa) and also Egypt.

This forum, the so-called "G14", meets on July 9 to discuss the financial crisis, trade and climate change and for the first time a G8 summit will also produce a joint G14 statement.

The euro surged around half a cent to session highs above 1.42 against the dollar immediately after the news.

A European source with knowledge of preparations for the summit also said China had raised the subject of a reserve currency debate and that it might be mentioned during the meeting, though the source added: "Any country at the meeting can raise issues they see fit."

"But whether there is a specific mention in the communique remains open," said the European source, adding that sherpas would discuss this further in preparatory talks on Friday.

The debate centres on proposals by some emerging powers that an alternative should be found to the U.S. dollar as the global reserve currency, to reflect the shifting balance of power in the globalised economy.

China has been particularly vocal. It holds more U.S. Treasury debt than any other country and has expressed fears that Washington's huge spending on economic stimulus programmes could spark inflation, hurting the value of China's dollar-denominated reserves.

China's central bank governor said in March the world should consider using the International Monetary Fund's Special Drawing Rights (SDRs) as a super-sovereign currency. The SDR is an international reserve asset allocated to IMF members and its exchange rate is determined by a basket of dollars, euros, sterling and yen.

Last month, Russian Finance Minister Alexai Kudrin even suggested that China's yuan could become a world reserve currency. Russia is the world's No. 3 biggest holder of foreign exchange reserves and has also expressed unease about the volatility of the dollar.

But China's proposal to use SDRs failed to gain ground after several world leaders, and officials from the IMF, backed the dollar as the global reserve currency.

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