Monday, April 20, 2009

China to cooperate with Russia against U.S. dollar


China supported Russia’s initiative to develop a new global reserve currency as an alternative to the U.S. dollar saying that such a move is necessary in today’s world. Moreover China is ready to discuss this issue at the G20 summit in London, a vice governor of the country's Central Bank said on Monday.

On the one hand Russia should be glad to have such a strong ally; on the other hand there likely will be no actions from the Chinese side because today China holds about $2 trillion in foreign exchange reserves. 

"We believe it is necessary to consider the IMF's role in this process and also define the possibility and the need to adopt measures allowing for Special Drawing Rights (SDRs) to become an internationally recognized super-reserve currency," Russia's proposal read. 

Hu Xiaolian said that China, which holds about $2 trillion in foreign exchange reserves, was prepared to debate the issue as "the dollar's dominance and U.S. economic woes could entail considerable currency fluctuations and affect the world financial situation." 

At the same time, she said that discussion into a new global currency could be started but considering the dollar's status as the current primary currency, "we should focus more on enhancing control over the existing system." 

The G20 summit, involving advanced and emerging economies and international financial institutions, will be held in London on April 2, aimed at finding ways to overcome the ongoing global financial crisis, RIA-Novosti reports. 

On March 13, China’s prime minister, Wen Jiabao, said he was concerned about the safety of those assets, particularly because huge economic stimulus plans could lead to soaring deficits in the United States, which could sink the dollar’s value. 

Should China lose its appetite for Treasuries, the United States’ borrowing costs could rise, making it more costly for Washington to carry out economic stimulus packages and for Americans to pay off their mortgages, nytimes.com reports. 

Nicholas Lardy, an economist and China specialist at the Peterson Institute in Washington, said that through its proposal, China was indicating that the dollar’s long dominance was unfair, allowing the United States to run huge deficits by borrowing from abroad, and that the risks to holders of Treasuries were growing.

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