July 9, 2009 / 1:56 PM / 10 years ago

China demands currency reform at G8, Britain skeptical

L’AQUILA, Italy (Reuters) - China on Thursday called for reform of the global reserve currency system at a meeting of world leaders in one of its most direct attacks yet on the dollar’s dominance.

G5 leaders (L-R) India's Prime Minister Manmohan Singh, Brazil's President Luiz Inacio Lula da Silva , Mexico's President Felipe Calderon, South Africa's President Jacob Zuma and Chinese State Councilor Dai Bingguo at the G8 summit in L'Aquila Italy July 8, 2009. REUTERS/Tony Gentile

Chinese State Councilor Dai Bingguo did not name the dollar at talks between G8 rich nations and G5 emerging powers, but was unequivocal in calling for the world to diversify the reserve currency system and aim at relatively stable exchange rates.

China’s ideas for changing the system had previously been mentioned in reports by its central bank, but had never been voiced in a speech by such a high-ranking political leader.

“We should have a better system for reserve currency issuance and regulation, so that we can maintain relative stability of major reserve currencies’ exchange rates and promote a diversified and rational international reserve currency system,” Dai told the summit in Italy, according to a statement read by foreign ministry spokesman Ma Zhaoxu.

British Prime Minister Gordon Brown, however, said any discussion of alternative currencies would be one for the long term to avoid destabilizing markets while world leaders focus on pulling the global economy out of a painful recession.

“In this present situation as we’re trying to get out of a deep recession, I don’t want to give the impression that there is some major change about to happen around the corner that suggests that the present arrangements are destabilized,” Brown told reporters after talks on the second day of the summit.

Foreign exchange markets <USD/> were unmoved by Dai’s comments, with investors’ focused on upbeat signals for the U.S. economy and global stocks as well as signs Germany’s Bundesbank may buy corporate bonds.


Adding potency to Dai’s words were his audience, a room including Brown, U.S. President Barack Obama and the leaders of Japan and the European Union, whose currencies are also often held as part of countries’ foreign exchange reserves.

Dai was attending the G8 plus G5 meeting in place of President Hu Jintao, who returned home to monitor developments in the northwestern region of Xinjiang after 156 people were killed in the country’s worst ethnic violence in decades.

There should be no question about whether Dai’s comments represented the views of the country’s top leadership, the spokesman, Ma, said.

“China’s position on reserve currencies has had different interpretations, but I can tell you that what I have just quoted is the most authoritative standpoint of the Chinese government,” he said.

Dai did not mention the Special Drawing Right (SDR), a unit of account used by the International Monetary Fund, which other Chinese officials have said could present a viable alternative to the dollar as a global reserve currency.

The People’s Bank of China made waves in March when it first suggested that the SDR — effectively a mixture of dollars, euros, sterling and yen — was better suited than any single country’s currency to be a yardstick for global trade and a reliable store of value.

Sources told Reuters that China had pushed for debate about reserve currencies at the summit.

There was no mention of the controversial issue in the draft declaration from the meeting of G8 leaders with the G5 group of Brazil, India, China, Mexico, South Africa and Egypt.

The closest it came was to call for the promotion of a stable international financial system.

The question of displacing the dollar as the world’s dominant reserve currency is highly sensitive for Beijing itself. Holding an estimated 70 percent of its $1.95 trillion in official foreign exchange reserves in the dollar, China has in the past been wary of saying anything that would undermine the value of the dollar and its investments.

Reporting by Simon Rabinovitch; editing by Patrick Graham

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