China, Russia Want New Monetary System

The Director of China's Central Bank Xiao Chuan has presented a proposal for the adoption of new international reserve currency, one that would not be under the contral of any one nation, and which would be based on functions such as trade pricing and settlements which could be carried out separately from financing the credit needs and imbalances of any one nation, such as the United States. The proposal, which may be presented at the upcoming G-20 meeting in England, was featured on the Chinese Central Bank's website. This proposal may also be considered the answer to Bernanke's expansion of Fed Reserve credit facilities, and intention to buy $300 billion of US Treasury securities. Bernanke's move reduced the value of China's holding of US securities by 5% because of the fallin value of the dollar.

Russia has been moving in the same direction. The Office of the Presidency published its own set of proposals for the London summit. This take up the question of monetary reform also, but in a much more abbreviated form than the Chinese Central Banker does. Russia has been transmitting this message through its diplomatic activities too. China was reported to be backing the Russian proposals last week, after Bernanke moved toward "quantitative easing." There is also a track at the United Nations where a panel of experts has been preparing a report calling for the dollar to be replaced.

Reaction to the Chinese proposal has primarily focussed on the idea that China is concerned above all with the value of its holdings of US Treasury securities. Brad Setser who counts Chinese investment in the US for the Council of Foreign Relations addressed this issue this morning in his blog. He drew attention to a piece published earlier in the month by Ted Truman of the anti social security and medicare institution associated with billionaire Peter Petersen. In Congressional testimony today both Geithner and Bernanke said they would reject the Chinese proposal.

However, it is not so clear that China is driven by the same kind of financial considerations in the way that westerners tend to obsess about. In the western type of view, China and the US are mutually dependent, we need to borrow from them they need the US to protect the value of their paper. There may well turn out to be problems with this view. Both Setser and Truman think the Chinese proposals should be discussed. That is a useful attitude, I would think. Even if discussed at the G20 probably the most that would come out is a committment to another conference discussion, or international agenda item. Russia's President expects a bit more than this.

Back in January and February China concluded a series of long term, 20 year, agreements for the supply of fuel with Russia, Venezuela and Brazil, and then later, a new set of agreements with Iran. China has also been making deals with Abu Dhabi and Saudia Arabia and with companies like Rio Tinto. In the US these are viewed as primarily financial deals, and discussed as loans, China is lending money. It could be though that these kinds of arrangements typify what Xiao Chuan means when he talks of separating commodity pricing and settlement from the credit functions of a reserve currency. There doesn't need to be one single moment for the emergence of such a new arrangement. Just a series of continuing agreements for the long term supply of products and services where the deals are priced on a dollar unit of account and settled on the basis of a basket of non-dollar currencies mixed with gold and perhaps oil. These transactions wouldn't need the creation of "money." Balances would be closed out in whatever the reference basket was made up of.

I don't know whether this kind of approach is excluded over here, or just ignored. I doubt it matters, which ever it is, or whether I know. One thing is quite striking. Compare these three recent speeches about ongoing international financial instability, Greenspan, Bernanke and Xiao Chuan. The last is from a year and a half ago. It is interesting, I thought,to compare how the Chinese official discusses the US, with the way the US officials discuss their views of the matter.


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