Is China dumping the dollar?

You may have seen that Matt Drudge has a screaming headline up right now, BEIJING TO PITCH NEW GLOBAL CURRENCY; DUMP DOLLAR." (Drudge links to a muuh more carefully worded Financial Times story.)

This strikes me as a significant moment, but let’s hang on a second before we lose our heads.

The story, also reported by the Wall Street Journal, is based on this rather mildly worded speech by Zhou Xiaochuan, the head of China’s central bank.

In it, Zhou asks, "What kind of international reserve currency do we need to secure global financial stability and facilitate world economic growth, which was one of the purposes for establishing the IMF?"

Theoretically, an international reserve currency should first be anchored to a stable benchmark and issued according to a clear set of rules, therefore to ensure orderly supply; second, its supply should be flexible enough to allow timely adjustment according to the changing demand; third, such adjustments should be disconnected from economic conditions and sovereign interests of any single country. The acceptance of credit-based national currencies as major international reserve currencies, as is the case in the current system, is a rare special case in history. The crisis called again for creative reform of the existing international monetary system towards an international reserve currency with a stable value, rule-based issuance and manageable supply, so as to achieve the objective of safeguarding global economic and financial stability.

Though Zhou does not say so explicitly, the clear implication is that the dollar isn’t doing these things. Interestingly, he cites John Maynard Keynes:

Back to the 1940s, Keynes had already proposed to introduce an international currency unit named "Bancor", based on the value of 30 representative commodities. Unfortunately, the proposal was not accepted. The collapse of the Bretton Woods system, which was based on the White approach, indicates that the Keynesian approach may be more farsighted.

But, he admits, "The re-establishment of a new and widely accepted reserve currency with a stable valuation benchmark may take a long time." As the WSJ explains:

[T]he technical and political hurdles to implementing China’s recommendation are enormous, so even if backed by other nations, the proposal is unlikely to change the dollar’s role in the short term. … The central banker’s proposal reflects both China’s desire to hold its $1.95 trillion in reserves in something other than U.S. dollars and the fact that Beijing has few alternatives. With more U.S. dollars continuing to pour into China from trade and investment, Beijing has no realistic option other than storing them in U.S. debt.

Looks like you can hang on to those greenbacks for a little while longer.