Reuters reports today that China wants the world to adopt a global basket-based reserve currency run by the IMF, which would make a basket of which the dollar fills 55 percent, the euro 34 percent and sterling and the yen make up the remaining 11 percent.
Reuters reports that Simon Derrick, head of Bank of New York-Mellon’s currency strategy team, said that China wants a lower level of dollar currency reserves.
Well it could get that starting today simply by selling dollars and buying euros, sterling and yen. So that doesn’t seem to me to me to explain why China wants the international reserve currency to be the basket currency. And this at the worst time for it to be raising the spectre of the dollar’s weakness.
Derrick also said that China will not start dumping the Treasury debt it holds, as that would undermine the value of its existing reserves and cause a spike in the value of its own currency, undermining the Chinese economy, but that it would gradually reduce its dollar reserves, which would put pressure on the dollar.
He went on to say that reduced Treasury purchases by China and other countries will eventually put pressure on the dollar, because the U.S. will have to rely more heavily on printing money to finance massive stimulus spending.
I think that is a piece of wishful thinking. Suggesting a gradual change is to suggest a measured change that doesn’t hurt the system.
Which again doesn’t explain why Premier Wen Jiabao said he hoped that the U.S. would remain credit worthy, which could only have the effect of causing others to waver in their confidence in the dollar.
Of course in the longer term that may drive the world to accept the basket currency, but with comments like that, who is to say that the system would survive to see the longer term?
I keep coming back to wondering what China’s long-term intentions are.
