As in ‘mutually assured destruction’…
John Kemp at Reuters makes the point that the “unstable stability,” whereby China can break the dollar’s reserve currency status at any time – but only at the risk of crystallising huge losses on its stockpile of US debt – has become the foreign exchange version of the Cold War stalemate.
But what are we to make of the flip-flop statements coming from officials in Beijing on the idea of a super-sovereign currency based around the IMF’s Special Drawing Rights?
China now wants a discussion about reserve currencies at next week’s G8 summit in Italy. Kemp wonders whether China is now preparing to deliver a coup de grace:
Pressing for a reserve currency discussion at the expanded G8 summit (which will also be attended by India, Brazil, Mexico, South Africa and Egypt) suggests China’s leaders are serious. They must have known that just pushing the issue onto the agenda would rekindle market fears about the dollar’s value.
But it could also be an attempt to create leverage and seize the initiative as part of wider efforts to shape the international financial agenda.
In the past, G8 summits have been structured as a monologue from the advanced industrial economies to the developing world. But following the debt crisis, the leading emerging markets are in no mood to be lectured.
It is also a sign China is ready to begin flexing its financial muscle and will have to be treated as an equal alongside the United States, EU and Japan, shaping as much as responding to the policy debate.
More dollar deliberations – FT Alphaville
The Chinese Proposal for a New Global Super Currency – Nouriel Roubini
Other Kemp columns – Reuters