Friday, 27 March 2009

China has the Power to Reduce the Dollar`s Dominance

Financial Times

Sir, If the Chinese want a system reducing the dominance of the US dollar as a reserve currency and instead have a more diversified reserve system (`China`s plan to end the dollar era`, Editorial, March 25), they have the means to do it.

They should let their own currency float, stimulate domestic demand to switch from a balance of payments surplus to balance of payments deficit, and in the process supply the world with a sizeable volume of freely convertible renminbi.

Their currency would then gradually find its place as an alternative reserve currency reflecting the shift of economic power from west to east.

In the process they would render the international financial system much more stable and they will stop worrying about losses on their dollar reserves after absorbing a one-off adjustment. Structural trade and payments imbalances, whether positive or negative, are the source of the current turmoil.

If the world leaders in their upcoming Group of 20 meeting cannot agree on anything substantial, they should at least agree to increase the resources available at the International Monetary Fund and to empower the IMF to act with corrective measures on structural surplus countries as vigorously as it addresses structural deficit countries.

If this symmetry in IMF`s operation is not achieved, the solution to the current problems will be the seeds for the next one.

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