Chinas dollar Achilles heel by dffhrtcv3

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									Monday 24 January 2011
Vol.2 Ed. 4.0

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                              China’s dollar Achilles heel

                                        By David Marsh


‘The current international currency system,’ President Hu Jintao said portentously last week, ‘is
the product of the past.’ The statement made headlines around the world. However, as always,
it was difficult to discern exactly what Hu was driving at.

China wants to modify the present currency arrangements under which the dollar is still by far
the dominant international money. But Beijing remains remarkably vague about what it wishes
to put in its place.

In the last couple of years, China has enacted a series of steps for enhancing the
renminbi’s global role.

China’s Achilles heel is this: if the world monetary system is outdated, then shouldn’t the
People’s Bank be lowering the volume of reserves held in dollars?

China remains officially tight-lipped about the proportion held in the greenback. China's foreign
exchange reserves rose to a record $2.85 tn by the end of last year, an 18.7% increase year-on-
year, according to the People's Bank. Yi Gang, vice-governor, has admitted that the reserves
increase ‘will be increasingly challenging China's asset management.’

Officially, the proportion of reserves held in dollar is a state secret. However, there seems to be
increasing awareness that this opacity doesn’t make much sense. We know (courtesy of Reuters)
that China Securities Journal, an official newspaper, citing unnamed reserve managers, said a
few months ago the reserves composition is in line with ‘the global average’: 65% in dollars, 26%
in euros, 5% in pounds and 3% in yen.

China could make a further step by communicating the currency reserve breakdown to the
International Monetary Fund. The IMF’s latest release, at the end of December, states that
overall world foreign exchange reserves at the end of September 2010 totalled $8,986 bn against
$8,421 bn at the end of the second quarter and $7,880 bn a year earlier.
However the ‘allocated reserves’ – basically the reserves for which member countries give the
IMF a currency breakdown, a list which excludes China and some other mainly developing
countries – were ‘only’ $4,999 bn – leaving a $4,000 bn ‘black hole’ of unallocated reserves. Of
the ‘allocated reserves’, 61% are in dollars and 27% are in euro. China would do everyone a
service if it started communicating its holdings to the IMF, so that the aggregate figures became
more meaningful. If we are to regard the world’s largest reserve holder as serious about
revamping the future of international money, then it should at least give us a bit more
information about the status quo.


David Marsh is Co-chairman of OMFIF.


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