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Experts call for diversified reserve currency ahead of G8 summit

By Wang Jianfen (chinadaily.com.cn)
Updated: 2009-07-05 19:54

The declining US dollar could not play the long term role as the world’s single reserve currency and a more diversified global currency system should be formed, prominent experts said Saturday at a global think tank summit in Beijing, days ahead of the G8 meeting this week. 

The US dollar has been under pressure since the US adopted a quantitative easing policy and let its currency devalue significantly to help fight recession. Quantitative easing is a monetary policy tool in which a central bank - like the Federal Reserve - floods the market with cash in an attempt to stimulate an economy in recession and to stave off deflation.

"The US dollar cannot and should not take all the responsibility for the world monetary system. We need a stable and serious transition to new international monetary regime," argued Jeffrey D. Sachs, director of the Earth Institute of Columbia University in the US.

After the transition, "the dollar will gradually depreciate by 20 or 25 percent to rebalance the world system overtime," Sachs believed.

Sachs explained the reason for the transition is that the US size "relative to China and other countries will diminish" and the US "is just simply not big enough"to dominate the global economy any more.

President of the Chinese University of Hong Kong, Lawrence J. Lau, believed that in the future, there may be no single reserve currency in the world and alternatives included, for example, in East Asia, establishing an East Asian bank for international settlement or issuing bonds denominated in local currencies.

A proposal for a new global currency to replace the dollar is likely to be raised at the July 8-10 summit of G8 nations, comprising Britain, Canada, France, Germany, Italy, Japan, Russia and the United States.

"If this issue is raised by leaders during the meeting, it is natural, because we are all discussing how to respond to the international financial crisis and promote recovery," a deputy Chinese foreign minister, He Yafei, said at a briefing last week.  

However, China has no plans to raise this issue but is willing to discuss it, said He.

China is attending the meeting in the Italian city of L'Aquila as part of a group of five large developing countries, including Brazil, Mexico, South Africa and India.

Beijing called in March for the creation of a new currency, possibly based on the IMF's Special Drawing Rights, created in the 1960s and used as the monetary standard for dealings between the fund and member governments.

According to Sachs, the SDR "should be remade to include more currencies including the yuan … SDR should include a broader base of international currencies."

And there is increasing calls for the creation of an Asian currency.

Sachs believed that Asia should "move forward the Asian monetary basket or the Asian monetary currency overtime".

It was also a trend for the Chinese mainland currency to replace the US dollar in East Asia, said Lau.

The Chinese mainland signed a long-awaited agreement with Hong Kong on June 29 to allow bilateral trade to be settled using the yuan, rather than Hong Kong or US currencies. China is also looking at allowing yuan trade settlement with other trading partners.

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