China’s super currency call may not float

China has launched a full-throated campaign calling for an alternative to the US dollar as a global reserve currency, but economists reckon that the idea may be a non-starter for the foreseeable future.

People’s Bank of China’s governor Zhou Xiaochuan has floated the idea of a new currency reserve system to replace the dollar. He identified the International Monetary Fund’s Special Drawing Rights (SDRs), whose value is linked to a basket of currencies, as a possibility. But economists have discounted the practicality of the idea.

“In the medium term, for perhaps the next 10 years, I have my gravest doubts as to whether an alternative reserve currency will come about,” Omkar Goswami, founder of CERG Advisory and former chief economist at the Confederation of Indian Industry, said.
In particular, Goswami said at the Credit Suisse Asian Investment
Conference in Hong Kong on Wednesday, China’s preferred alternative currency reserve - the SDRs - “are a big myth”. They were used only occasionally as a supplementary reserve to deal with capital and current account crises that by the standards of today’s global financial meltdown were insignificant in magnitude.

Credit Suisse global economics and strategy group chair Giles Keating concurs. “In my view, it’s unlikely that a fundamental change towards an SDR-based reserve system is unlikely to occur in a short time-scale.”

Credit Suisse chief regional economist Dong Tao says that the timing of China’s campaign for an alternative reserve currency is interesting.  “China is trying to square up ahead of the upcoming G-20 summit, and given that many others around the world believe that the US dollar has lost its credibility, it could be one of the issues that comes up.”