At conference, China demands currency reform; France sympathetic

By Simon Rabinovitch and Matt Falloon
Reuters
Thursday, July 9, 2009

http://www.reuters.com/article/asianCurrencyNews/idUSPEK20673520090709

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

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

France also unexpectedly called for a currency discussion and moving toward a "multimonetary" system, though Britain warned any debate should be reserved for the long term to avoid destabilizing markets in the midst of a global recession.

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.

Dai made his statement to a meeting including British Prime Minister Gordon Brown, U.S. President Barack Obama and the leaders of Japan and the European Union, whose currencies are often held as part of countries' foreign exchange reserves.

There is no question on whether the comments represented those of of China's top leadership, the spokesman 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.

Foreign exchange markets were unmoved by Dai's comments, with investors focused on upbeat signals for the U.S. economy and signs Germany's Bundesbank may buy corporate bonds.

French President Nicolas Sarkozy later gave China's concerns a boost by saying he hoped major industrialized and emerging nations would discuss currency systems when the global economy had largely moved beyond the crisis.

"These are complex subjects where the positions have to evolve, but we can't remain based on a single currency," he said.

"We have to ask ourselves: Shouldn't a politically multipolar world correspond to an economically multimonetary world?" Sarkozy said, referring to the dollar.

British Prime Minister Gordon Brown, however, said any discussion of alternative global currencies was best avoided while leaders were focused on pulling the economy out of 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.

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

Dai did not mention Special Drawing Rights (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 first suggested in March 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 issue in the draft declaration from the meeting of G8 leaders with the G5 group. The closest it came was to call for the promotion of a stable international financial system.

"We think it's not a discussion that would make sense for heads of state to deal with," said Marco Aurelio Garcia, Brazilian President Luiz Inacio Lula da Silva's top foreign policy advisor after bilateral Brazil-U.S. talks on Thursday.

"It's a discussion of obvious interest for economists," he said.

The question of displacing the dollar as the world's dominant reserve currency is highly sensitive for Beijing. 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.

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