Chinese State Councillor Calls for Diversification of Global Reserve Currency System

China has renewed its push for an alternative reserve currency at the G 8 Summit taking place in Italy. Chinese State Councillor Dai Bingguo did not mention the dollar specifically but called for global diversification of the global reserve currency system. In a statement read by foreign ministry spokesman Ma Zhaoxu Dai stated, “We should have a better system for reserve currency issuance and regulation, so that we can maintain relative stability of major reserve currencies’ exchange rates and promote a diversified and rational international reserve currency system.” Dai is attending the G8 summit in place of Chinese President Hu Jintao who returned to China to deal with political instability in the Xinjiang region.

British Prime Minister Brown Skeptical

British Prime Minister Gordon Brown was skeptical saying that any discussion of alternative reserve currencies would have to wait until global markets recover from the current recession. Brown also voiced concerns that changing reserve currencies at the present time could destabilize markets and that the focus should be on recovery from the recession. Brown stated, “In this present situation as we’re trying to get out of a deep recession, I don’t want to give the impression that there is some major change about to happen around the corner that suggests that the present arrangements are destabilized.”

China Leery of Undermining the Dollar

Currency exchange rates were largely unaffected by Dai’s statements and investors focused on positive US data and signals that Germany’s Bundesbank may purchase corporate bonds. In the past China has been leery of making any moves that could undermine the dollar. 70% of China’s foreign exchange reserves are dollar denominated making the dollar a very sensitive topic for China. In the past Chinese officials have suggested that the Special Drawing Right, which is an account unit used by the International Monetary Fund, is a viable alternative to the dollar as a reserve currency.

Dollar’s Status Secure For Now

For now the dollar’s status as a global reserve currency seems secure. There was no mention of the issue in a statement from the G8 and G5 nations.