* China proposes sweeping overhaul of world monetary system
* IMF's special drawing right could replace dollar over time
* Advantage would be greater stability, fewer crises
(Adds comment, details, background)
By Alan Wheatley, China Economics Editor
BEIJING, March 23 China on Monday proposed a
sweeping overhaul of the global monetary system, outlining how
the dollar could eventually be replaced as the world's main
reserve currency by the IMF's Special Drawing Right.
The SDR is an international reserve asset created by the
International Monetary Fund in 1969 that has the potential to
act as a super-sovereign reserve currency, Zhou Xiaochuan,
governor of the People's Bank of China, said in remarks
published on the central bank's website, www.pbc.gov.cn.
"The role of the SDR has not been put into full play due to
limitations on its allocation and the scope of its uses.
However, it serves as the light in the tunnel for the reform of
the international monetary system," he said.
Zhou diplomatically did not refer explicitly to the dollar.
But his speech, issued exceptionally in English as well as
Chinese, spells out Beijing's dissatisfaction with the primacy
of the U.S. currency, which Zhou says has led to increasingly
frequent global financial crises since the collapse in 1971 of
the Bretton Woods system of fixed but adjustable exchange rates.
"The price is becoming increasingly high, not only for the
users, but also for the issuers of the reserve currencies.
Although crisis may not necessarily be an intended result of the
issuing authorities, it is an inevitable outcome of the
institutional flaws," Zhou said.
Jim O'Neill, chief economist at Goldman Sachs in London,
said the dollar-based system of floating exchange rates had
demonstrated great flexibility down the years.
"But over time, as the world is taken off the steroids of
the overleveraged U.S. consumer, you can't have the same dollar
dependence as we have had. But who can provide it? And the
answer is, if it functioned properly, maybe the SDR could have a
much bigger role," O'Neill said.
A super-sovereign reserve currency would not only eliminate
the risks inherent in fiat currencies such as the dollar --
which are backed only by the credit of the issuing country, not
by gold or silver -- but would also make it possible to manage
global liquidity, Zhou argued.
"When a country's currency is no longer used as the
yardstick for global trade and as the benchmark for other
currencies, the exchange rate policy of the country would be far
more effective in adjusting economic imbalances. This will
significantly reduce the risks of a future crisis and enhance
crisis management capability." he said.
Reform of the international monetary system is likely to
take a back seat to the more urgent task of economic and
financial stabilisation when leaders of the Group of 20
developed and emerging economies meet in London on April 2.
But Zhou's speech shows that the issue is a pressing one for
China, whose top officials regularly bemoan the volatility of
the dollar and what they see as U.S. economic mismanagement.
Creating a new, widely accepted reserve currency may take a
long time, Zhou acknowledged. It would be a "bold initiative
that requires extraordinary political vision and courage".
Allocating more SDRs would give the IMF more resources and
help it address imbalances in power within the fund, where big
emerging economies like China muster a fraction of the votes
cast by Europe and by the United States, which wields a veto.
As well as a further allocation of SDRs, Zhou proposed a
series of steps to broaden the unit's use so it can evolve into
a reserve currency:
-- Set up a settlement system with other currencies so there
SDR can be widely accepted in global trade and financial
transactions. Currently, the SDR is largely an artificial unit
used by governments and international institutions.
-- Actively promote the use of the SDR in trade, commodities
pricing, investment and corporate bookkeeping.
-- Create financial assets denominated in SDRs to increase
its appeal. The introduction of SDR-denominated securities,
which is being studied by the IMF, would be a good start, Zhou
-- Expand the basket of currencies forming the basis for
valuing the SDR to include currencies of all major economies.
If the SDR were backed by real assets, such as a reserve
pool entrusted to the IMF, confidence in its value would rise
and destabilising currency speculation would be deterred, Zhou
(Reporting by Alan Wheatley; Editing by Toby Chopra)