India Joins Russia, China in Questioning U.S. Dollar Dominance

[xinhui]

India Joins Russia, China in Questioning U.S. Dollar Dominance
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By Mark Deen and Isabelle Mas

July 4 (Bloomberg) -- Suresh Tendulkar, an economic adviser to Indian Prime Minister Manmohan Singh, said he is urging the government to diversify its $264.6 billion foreign-exchange reserves and hold fewer dollars.

“The major part of Indian reserves are in dollars -- that is something that’s a problem for us,” Tendulkar, chairman of the Prime Minister’s Economic Advisory Council, said in an interview yesterday in Aix-en-Provence, France, where he was attending an economic conference.

Singh is preparing to join leaders from the Group of Eight industrialized nations -- the U.S., Japan, Germany, Britain, France, Italy, Canada and Russia -- at a summit in Italy next week which is due to tackle the global economy. China and Brazil will also send representative to the summit.

As the talks have neared, China and Russia have stepped up calls for a rethink of how global currency reserves are composed and managed, underlining a power shift to emerging markets from the developed nations that spawned the financial crisis.

“There should be a system to maintain the stability of the major reserve currencies,” Former Chinese Vice Premier Zeng Peiyan said in a speech in Beijing yesterday, highlighting China’s concerns about a global financial system dominated by the dollar.

Fiscal and current-account deficits must be supervised as “your currency is likely to become my problem,” said Zeng, who is now the head of a research center under the government’s top economic planning agency. The People’s Bank of China said June 26 that the International Monetary Fund should manage more of members’ reserves.

Russian Proposals

Russian President Dmitry Medvedev has repeatedly called for creating a mix of regional reserve currencies as part of the drive to address the global financial crisis, while questioning the dollar’s future as a global reserve currency. Russia’s proposals for the Group of 20 major developed and developing nations summit in London in April included the creation of a supranational currency.

“We will resume” talks on the supranational currency proposal at the G-8 summit in L’Aquila on July 8-10, Medvedev aide Sergei Prikhodko told reporters in Moscow yesterday.

Singh adviser Tendulkar said that big dollar holders face a “prisoner’s dilemma” in terms of managing their holdings. “That’s why I’m telling them to do this,” he said.

He also said that world currencies need to adjust to help unwind trade imbalances that have contributed to the global financial crisis.

“The major imbalances which led to the current situation, the current account surpluses and deficits, have to be addressed,” he said. “Currency adjustment is one thing that suggests itself.”

Emerging-Market Dependence

For all the complaints about the dollar, emerging markets such as India remain dependent on the currency of the U.S., the world’s largest economy and a $2.5 trillion export market. The IMF said June 30 that the share of dollars in global foreign- exchange reserves increased to 65 percent in the first three months of this year, the highest since 2007.

Tendulkar said that the matter needs to be taken up in international talks, and that it emphasizes the need for those talks to go beyond the traditional G-8.

“They can meet if they want to,” he said. “The G-20 has a wider role, has representation of the countries that are likely to lead the recovery process.”

To contact the reporters on this story: Mark Deen in Aix en Provence, France at [email protected]; Isabelle Mas in Aix en Provence, France at [email protected].
Last Updated: July 3, 2009 18:00 EDT

[russian1983]

returning to gold standard is very similar to baskets of currencies as far as strategy for a more solid financial interbank currency system. unfortunately, gold standard was basically abandoned because US treasury wanted to print more money and create huge amounts of dollar mass (to fund wars, political and economical ambitions).

so here are now, near the default. there has never been a country with as much debt in history. So the tendency of countries that hold significant US debt (particularly China) to want some kind of insurance (not sure what really can be done here)

for decades this was the schematics....

issue long 30 year bills, buy back short term treasuries.

right now there is billions of 30 and intermidiate debt being issued to cover giant holes the financial bubbles that were supporting this parade of indefinite borrowing. its unsustainable and im sorry, its coming up for a currency collapse.

so here is the scenario. currently the debt issuing is pulling money out of circulation. thats how the FED "controls" inflations anyway (thanks greenspamm). this creates DEFLATION.

at the same time the treasury is printing more money to buy back expiring and recent issue short term t-bills. this will push gold and silver prices lower, and strengthen the dollar. this is a TEMPORARY move.

Chinese, Russians and everyone with a head on their shoulders, so to speak, understands that. what happens after this is questionable but has a very high probability of currency collapse since its not supported by ANYTHING but giant amounts of unrepayable debt.

[Merlin]

This is going to be discussed at the G8 Summit to be held soon in Italy, see below. But I think this will just be discussions and exchange of views. Actions will have to be from country, or group of countries to country.

China supports this idea in principle. As usual it calls for moderation, to proceed slowly and gentle, watching out for bad side-effects. Clearly it does not want a fast collapse of the US dollar. It hold 3 trillion dollars of US debts.

G-8 Poised to Discuss Dollar's Global Status

6 July [WSJ] AIX EN PROVENCE, France -- France, Russia and India questioned the role of the dollar as the world's reserve currency, indicating its status is likely to be discussed at this week's Group of Eight summit.

At a conference here this weekend French Finance Minister Christine Lagarde called for better foreign-exchange policy coordination, hinting that the dollar's role as a reserve currency may need to be discussed. ...

[Yusuf]

China is doing a lot to project the RMB as an alternative to the Dollsr. It has been cutting deals with many countries to use RMB as the currency of trade.

What is the US doing to maintain the preeminence of the Dollar?

[xinhui]

China is doing a lot to project the RMB as an alternative to the Dollsr

no, China is using currency swap as a way to reduce the role of the dollar in China, read China, selected trade partners, but overall, it has no impact in the greater world trade.

The area China is gearing for influence is the SDR in IMF's bond issue but SDR is not a "currency", so it really do not apply.

What is the US doing to maintain the preeminence of the Dollar?

No need to do anything, just allow market to rebound to be enough.

[Steezy]

unfortunately, gold standard was basically abandoned because US treasury wanted to print more money and create huge amounts of dollar mass (to fund wars, political and economical ambitions).

Surely the world only has itself to blame for following the US with this in the first place. They're the one's laughing at everyone at how they basically could make it one rule for them and another set for everyone else and thus become the richest country ever. I can't believe some of the stupid shit that's happened in the world on the international level the past few centuries

[Yusuf]

China has only now proposed the SDR. They were talking about using RMB for trade. It did nit cut much ice. Then they teamed up eith Russia to come up with the SDR. China sure has the intentions of projecting the RMB in the future.
It's only concern right now is that it's holding $2 trillion.

One way it's offloading that is giving aid to smaller nations and buying natural resources

[xinhui]

English is such a funny language as it can't tell the different between "loan" "aid" and "Credit"

Most of the aid is "loan" out to much larger nations, China actually give very little in form of "aid" to "small nations"

buying natural resources

There is only limited stock pile China can do before price itches up again. it is not a sub for actual money.

[Merlin]

The move from the Dollar is very complex. It needs good idea, and good implementation.

China and the dollar

9 July [Economist] The dollar’s role as the world’s main reserve currency is being challenged .... In the build-up to the annual summit of G8 countries, which began on July 8th in the Italian city of L’Aquila, officials in China, Russia and India all called for an end to the dollar’s dominance in the international monetary system. Dmitry Medvedev, Russia’s president, declared on July 5th that the dollar system is “flawed”; his central bank has been reducing its dollar holdings. The People’s Bank of China (PBOC), China’s central bank, repeated its call for a new global reserve currency in June and is now taking the first steps towards turning the yuan into a global currency.

Beijing is particularly influential in this debate. The dollar accounts for 65% of the world’s foreign-exchange reserves ..., only slightly less than a decade ago and well ahead of the euro’s 26% share. Three-quarters of all reserves are in the hands of emerging economies; China alone holds one-third of the global stash.

So China has particular cause to worry that America’s massive printing of money in response to the financial crisis will undermine the value of its dollar reserves. There is much domestic anger about the potential losses China may face as a result of its lending to rich Americans. The government would like to diversify out of dollars: its new purchases of Treasury securities have fallen sharply this year. But any attempt to dump its stock of dollars would risk triggering a plunge in the currency. Instead, officials are mulling two ways out of the “dollar trap”: persuading the world to adopt a new global currency and encouraging the international use of the yuan.

In an essay in March, Zhou Xiaochuan, the governor of the PBOC, argued that basing the international financial system on a national currency will tend to exacerbate global imbalances. The dollar’s reserve-currency status let America borrow cheaply, causing the country’s credit and housing bubbles to persist for longer than they otherwise would have. Mr Zhou proposed that the world should replace the dollar with a global reserve currency, the SDR (Special Drawing Rights). Created by the IMF in 1969, and now based on the weighted average of the dollar, euro, yen and pound, the SDR was designed as a reserve currency but never took off. SDRs today add up to less than 1% of total reserves.

Under Mr Zhou’s plan the amount of SDRs would be hugely increased and the basket expanded to include other currencies, notably the yuan. Mr Zhou also proposes an SDR-denominated fund, managed by the IMF, into which dollar reserves could be exchanged for SDRs. Countries could then reduce their dollar exposure without pushing down the dollar (although it is unclear who would bear any exchange-rate losses).

Brazil, India and Russia have backed Mr Zhou’s proposal. But the SDR is unlikely to become a reserve currency any time soon. It would take years to develop SDR money markets that are liquid enough to be a reserve asset. Although the IMF’s executive board approved the first issuance of SDR-denominated bonds on July 1st, as the fund attempts to boost its resources, the bonds can only be bought and traded by central banks, not by private investors.

China’s alternative ploy is to promote the yuan’s use in international trade and finance. Starting on July 6th selected firms in five Chinese cities are now allowed to use yuan to settle transactions with businesses in Hong Kong, Macau and ASEAN countries. Foreign banks will be able to buy or borrow yuan from mainland lenders to finance such trade. In June Russia and China agreed to expand the use of their currencies in bilateral trade; Brazil and China are discussing a similar idea.

The PBOC has also signed currency-swap agreements with Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea. The central bank will make yuan available to pay for imports from China if these countries are short of foreign exchange. In another recent move, Hong Kong banks are now allowed to issue yuan-denominated bonds, a step towards building an offshore yuan market. ....

[xinhui]

China’s Dollar Diversification Not Suitable for Japan, DPJ Says
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China?s Dollar Diversification Not Suitable for Japan, DPJ Says - Bloomberg.com
By Sachiko Sakamaki and Takashi Hirokawa

Aug. 3 (Bloomberg) -- Japan’s opposition shouldn’t follow a push by China to diversify foreign-currency reserves away from the dollar if it wins this month’s parliamentary election, Policy Chief Masayuki Naoshima said.

“I don’t think Japan can adopt policies that would prompt a drastic drop of the dollar or make other major changes during a global recession,” Democratic Party of Japan lawmaker Naoshima said in an interview in his office last week. “There may be various debates for the distant future.”

DPJ Secretary-General Katsuya Okada last month said the party has no plans to shift assets away from the dollar. His view contrasts with that of shadow finance minister Masaharu Nakagawa, who said Japan should buy new bonds issued by the International Monetary Fund as an alternative to Treasuries.

Japan is the world’s second largest holder of foreign- exchange reserves, with about $1 trillion. China’s reserves topped $2 trillion for the first time in the second quarter.

Chinese Premier Wen Jiabao said in March he was concerned U.S. borrowing to finance stimulus measures would erode the value of the $801.5 billion in Treasuries held by his nation’s investors. China and other countries are buying IMF bonds that will pay an interest rate pegged to a basket of currencies grouping the dollar, euro, yen and pound.

Naoshima also pledged to cut government bureaucracy in a DPJ government, echoing a policy platform released on July 27. The party will eliminate wasteful spending by tapping money from special accounts managed by the country’s bureaucrats and abolishing some tax deductions, according to the platform.

‘Big Government’

“Japan has a big government now if you include quasi- government entities,” said Naoshima, who is an upper house lawmaker. “We want to trim it while providing better social security.” The party will announce what it calls a fiscal rehabilitation plan in December, he said.

Prime Minister Taro Aso promised July 31 that his Liberal Democratic Party will boost economic growth to 2 percent by 2011 and increase disposable household income by 1 million yen in 10 years. The DPJ is favored to win this month’s election, according to a Yomiuri opinion survey published July 24.

To contact the reporter on this story: Sachiko Sakamaki in Tokyo at [email protected]; Takashi Hirokawa in Tokyo at [email protected]
Last Updated: August 2, 2009 22:42 EDT

[xinhui]

China to Use Yuan to Buy Bonds From IMF

China to Use Yuan to Buy Bonds From IMF - WSJ.com

By TERENCE POON and ANDREW BATSON

BEIJING -- China will buy bonds from the International Monetary Fund using the yuan, extending current practices where member nations make most of their contributions to the IMF in local currencies.

The IMF said Wednesday China has agreed to purchase approximately $50 billion worth of bonds denominated in Special Drawing Rights, a fundraising effort that is part of a broader push to bolster the IMF's resources. Brazil and Russia have also said they each intend to buy as much as $10 billion of bonds from the IMF, which hasn't issued debt before.

Many analysts had expected China would sell some of its more than US$2 trillion in foreign-exchange reserves to buy the IMF bonds, in order to reduce its exposure to the U.S. dollar. But according to the agreement posted on the IMF Web site, China will use its own currency.

That's in line with how member nations now pay for their quota contribution, which determines their voting rights in the IMF and how much they can borrow from the fund. Members pay 75% of their contribution in local currencies, and 25% in SDRs or major international currencies. But unlike a quota contribution, the bond purchase won't raise China's voting rights in the IMF.

The SDR is used as a unit of account in transactions between the fund and its member countries. Its value is based on a weighted basket of four currencies - the euro, the U.S. dollar, the Japanese yen and the British pound.

China is the first nation to sign an agreement to buy the bonds, a step that demonstrates the nation's growing financial clout. The IMF uses the money raised from member contributions in their various currencies as the basis for its lending to nations in financial distress.

The addition of the SDR-denominated bonds to China's assets should help the nation painlessly diversify its foreign-exchange reserves, the world's largest. U.S. dollar assets now account for a good portion of the reserves, but because China's positions are so large it would be difficult for it to switch out of the dollar and into something else without causing market turmoil.

In a research note, Barclays Capital economist Wensheng Peng said the yuan used for China's payment will eventually come back into China, as the funds are lent out to member nations who then convert them to major currencies such as the dollar.

China's purchase of 32 billion SDR worth of bonds will be staggered over time, the agreement says, with no more than 4 billion SDR worth purchased in any given week.

Write to Terence Poon at [email protected] and Andrew Batson at [email protected]