Apply Now USA & China - Debate Over Reserve Currency Register Now
In the meeting of Group 20 in London in April, China impressed the summit by its viewpoint regarding the reform of the international monetary system, including supporting a "super-sovereign reserve currency" plan proposed by Russia. It is viewed like a challenge for the US Dollar's reserve currency statue. As the world's biggest Dollar-advocator, with US$ 1 trillion lying rolling around in its bank, why should China make a real proposal to against its own major currency reserve?
Debtor or Saver: Who Pays for your Crisis?
To repair the economy in crisis, US will have a $1.75 trillion-fiscal-deficit for 2009, this means Fed has now started printing money. Extra money supply may provide an abundance of liquidity and stimulate the economy in depression. Meanwhile, because the world's largest debtor, the US could also reduce its pressure to pay foreign debts with the inflation brought by extra money supply. The US Dollar will depreciate with this course, which makes other reserve currencies appreciate, for example Euro, Pound and Yen. In order to market their particular economy and export, these countries could also begin to print money. Finally, this could hurt two types of people-creditors and savers. Creditors have to follow relatively a low interest rate rate; and savers' holding is devaluing day by day. As the largest saver in the world along with the biggest creditor from the US, China does have reasons to be worried.
China's Dilemma in Dollar Domination
For year, China accumulated enormous Dollar reserve, almost equal to half size of the 2008 GDP, this expose the country a great deal to America's financial well being. But even in times of crisis, US Dollar remains China's first choice in foreign exchange reserve, given it never ever comes with an option. As of 2008, 64% in the world's currency reserve was at US Dollar; about 50 % of international transactions today are dominated in US Dollar; many of the world's currencies are pegged from the US Dollar. As the US Dollar maintains the reserve currency status, it really is easy for your US to perform higher trade deficits as well as over issue its currency. Under this situation, introducing a fresh global reserve currency to diversify the chance of foreign exchange reserve may be a method for China out from the adverse impact of Dollar domination.
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