China calls for the reign of the dollar to end

China has called for the eventual replacement of the dollar as the world's reserve currency, in a sign of its growing concern about the dominant role played by the US in the global economy. The bold proposal, just days before world leaders gather in London to discuss the financial crisis at the G20 meeting, was made by the head of the Chinese central bank. In an essay published both in Chinese and English on the bank's website, Zhou Xiaochuan argued that cost of using the dollar as a global reserve currency "may have exceeded its benefits". Without directly naming the greenback, he argued that the current international monetary system is causing frequent and increasingly intense financial crises. He added that the United States is "constantly" torn between achieving its domestic monetary policy goals and meeting the international demand for a reserve currency. Countries who issue a reserve currency "either fail to adequately meet the demand of a growing global economy for liquidity as they try to ease inflation at home, or create excess liquidity in the global markets by overly stimulating domestic demand". Mr Zhou's essay comes days after the US announced that it would buy back as much as $300bn (£20bn) of Treasuries and $1 trillion of illiquid bank assets. Since the Federal Reserve is likely to print more money to finance the purchase of the Treasuries, it could weaken the dollar and further devalue China's $1.95 trillion of foreign reserves. Earlier this month Wen Jiabao, the Chinese prime minister, said that he was "worried" about the safety of China's dollar assets, and urged the US to "stay a credible nation". "China is a hostage," said Andy Xie, an independent economist in Shanghai, as Beijing officials promised to confront their US counterparts at the G20 meeting. Instead of using the dollar, Mr Zhou proposed expanding the use of "special drawing rights", a type of synthetic currency created by the International Monetary Fund in the 1960s. The value of the SDR, which would be an independently-controlled currency, would be determined by a basket of major currencies. The SDR was originally created as an international reserve currency, but its use was torpedoed by a lack of cooperation from the US. The technical and political hurdles to Mr Zhou's plan, which was first proposed by John Maynard Keynes in the 1940s, are enormous, and the dollar is unlikely to be replaced in the near-term. However, Russia has made a similar argument recently in a sign of the concern that developing countries have about their lack of a say in how the global economy is managed. Russia strongly criticized the "obsolete unipolar world economic order". Mr Zhou also argued that a change in the system would benefit the US. "The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws," he said.