Central Bank Governor Proposes SDR as Main Reserve Currency

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Mar. 24 – China’s central bank governor has released a proposal calling for the overhaul of the global monetary system and replacing the world’s main reserve currency with the Special Drawing Right (SDR) prior to the start of the  G20 meetings in London next week.

In his essay published in Chinese and English on the Central Bank website, Zhou Xiaochuan said: “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.”

The International Monetary Fund created the SDR in 1969 as an international reserve asset that can also be utilized as a super-sovereign reserve currency. The IMP is currently using the SDR as a way of accounting for its transactions with member nations. The financial crisis is pushing China to become a more active player  in world affairs. Recently, Wen Jiabao, expressed worries over huge Chinese holdings of U.S. government bonds and asked the United States to ensure the safety of its investment. China is now the United States largest foreign creditor with US$1 trillion worth of debt.

According to WSJ, even if the Chinese proposal is supported by other countries, it is unlikely to change the dollar’s role in the near future because of technical and political constraints.

Overseas central banks still keep most assets in the form of U.S. dollars and dollar securities that can be used to stabilize the value of domestic currencies.

Mr. Zhou also cited that the dominance of a few currencies, like the dollar, euro and yen must be decreased since nations concentrate their assets in those reserve currencies, which in turn makes financial systems prone to volatility.

The IMF’s deputy managing director, John Lipsky, told the WSJ that the proposal should be taken seriously.”It reflects officials’ concerns about improving the stability of the financial system,” he said. “It’s interesting because of China’s unique position, and because the governor put it in a measured and considered way.”

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