In an essay released Monday in Beijing, Chinese central bank governor Zhou Xiaochuan called for a creation of a new currency to eventually replace the US dollar as the main global reserve currency. This joins Russia in making a call to shift the global economic fulcrum away from the policies of the United States and wealthy nations. The currency impact was immediate as the Chinese Yuan dramatically strengthened in off-shore (NDF) trading.
As the world's largest holder of US dollars as a reserve currency and US Treasury securities, China appears to be growing more and more assertive over it's rights. They also gave notice that US Treasury, GSE, and corporate debt is not the only paper they will buy with their US dollars. At a press briefing prior to President Hu Jintao's attendance at the April G20 meetings in the UK, the Chinese central banks vice governor, Hu Xiaolian, said that they would consider buying bonds issued by the IMF. Remember, Russia recommended that the IMF issue a new reserve currency to update the "obsolescent world economic order."
This discussion began after Chinese Premier Wen Jiabao commented that he was concerned over the direction of US policy and had "worries" over China's significant holdings of US government bonds. Given the "Zepplinizing" of US Treasury debt supply this coming year, the Chinese have every right to be concerned. The quantitative easing announcement last week by the Federal Reserve could also be driving the Chinese concern over the US dollar outlook.
All of this occurring at this time is not surprising. The G20 meeting in London is happening on April 2nd and the US releases its currency manipulators report on April 15th.
Yesterday, the US Treasury announced their nominee for Undersecretary for International Affairs who is responsible for US dollar policy. The nominee, Lael Brainard , comes from Brookings where she was the vice president and director of Global Economy and Development. She was the former White House Deputy National Economic Adviser and Associate Professor at MIT. Brainard has focused on competitiveness, trade, international economics, U.S. foreign assistance and global poverty.
During the campaign last year, she was considered to be a potential US Trade Representative for Obama. In this vein, she said that the US needs to have a material shift in resources within in the USTR toward more trade enforcement. More importantly at that time, she criticized the Bush administration for repeatedly failing to label China as a currency manipulator.
"We can't keep giving China a free pass on maintaining an undervalued currency. We did that for about seven years," Brainard said. Obama would use "existing authorities and all diplomatic means at his disposal" to pressure China and supports legislation to give the White House more tools, she said.
However in her latest article , she discusses emerging economies and how America's traditional place as the world's economic leader, which grew out of Bretton Woods, is being challenged by emerging countries of China, India, Brazil, and Russia. "This dispersion of economic power means that nations that once watched from the sidelines are now production and distribution hubs, service centers and financial headquarters."
Unlike the heated campaign rhetoric, this should mean that Ms. Brainard will bring a cautious and balanced approach to working with the Chinese. This would be welcome news to the global markets and the global economy. The last thing the world needs now is a verbal trade & investment war between the US and China.