A reserve currency is the denomination in which a government holds its reserves. Currently, close to 90% of the currency reserves worldwide are in US dollar and the euro.

The  online paper stated further  that a new currency reserve system controlled by the International Monetary Fund could prove more stable and economically viable.

While most financial  analysts do not believe that the dollar will be replaced as the world’s dominant foreign exchange reserve anytime soon, the proposal shows  China’s step towards a more influential role in the world.

China has nearly $2 trillion  in foreign exchange reserves, the world’s largest, and more than half of those holdings  are reported to be made up of United States Treasuries and other dollar-denominated bonds.

On March 13, China’s prime minister, Wen Jiabao, said he was concerned about the safety of those assets.

Then,  China’s bold idea on reserve currency,  released more than a week before a major meeting of leaders from the Group of 20 major economies in London which will focus on measures to alleviate the global economic crisis,  point to the fact that  Beijing is worried that its huge dollar-denominated foreign reserves could lose significant value in coming years.

The timing of the Chinese announcement, analysts said, could also be aimed at giving Beijing more leverage to negotiate with the United States and other nations in London on trade and on proposals about how to stabilize the global economy.

During the meeting, beginning on April 2, China is expected to call for developing economies to have a bigger say in global finance and step up pressure for changes to a system dominated by the US dollar and Western governments.

However, China is cautious when it discusses buying or selling Treasuries, for fear of sending a signal that could significantly affect currency markets. So in a separate announcement on Monday ( Mar 23), China said it would continue to buy Treasuries, something the United States has encouraged.

Going back to Mr. Zhou’s article, published in English and Chinese  he said the international community should consider expanding the International Monetary Fund’s Special Drawing Rights.

Such a proposal has been suggested before by developing countries but was not supported by the United States,  wary that it could be inflationary and affect the central role of the dollar.

Mr. Zhou said the goal of reforming the international monetary system was to “create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run.”

Source : Konaxis