A shot across the bow from China on Obama’s reckless borrowing
It would appear that China, the largest lender to the United States, has no intention of putting up with the economic plans of the Obama administration. The Peoples Bank of China has a trenchant analysis of the world’s current reserve currency, the dollar, which it proposes dethroning — to be replaced by one that is “rule-based issuance and has a manageable supply”. Ouch! In our opinion, China has signaled that it has no stomach to fund the Obama administration’s absurd spending plans:
The outbreak of the current crisis and its spillover in the world confronted us with the long existing but still unanswered question, i.e., what kind of international reserve currency do we need to secure global financial stability and facilitate world economic growth, which was one of the purposes for establishing the IMF?
There were various institutional arrangements in an attempt to find a solution, including the Silver Standard, the Gold Standard, the Gold Exchange Standard and the Bretton Woods system. The above issue, however, as the ongoing financial crisis demonstrates, is far from being solved, and has become even more severe due to the inherent weaknesses of the current international monetary system.
Theoretically, an international reserve currency should first be anchored to a stable benchmark and issued according to a clear set of rules, therefore to ensure orderly supply; second, its supply should be flexible enough to allow timely adjustment according to the changing demand; third, such adjustments should be disconnected from economic conditions and sovereign interests of any single country.
The acceptance of credit-based national currencies as major international reserve currencies, as is the case in the current system, is a rare special case in history. The crisis called again for creative reform of the existing international monetary system towards an international reserve currency with a stable value, rule-based issuance and manageable supply, so as to achieve the objective of safeguarding global economic and financial stability.
As the FT noted: ““This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC.” No kidding. Maybe it is time after all for China, with its $2 trillion in forex reserves, to become a member of a new G-9. Clearly China thinks so.