China economist blasts dollar dominance on eve of G20

* Paper by economist from group organising China G20 meeting

* Says countries, IMF must act to stabilise reserve
currencies

* Proposals unlikely to garner support from developed
economies

BEIJING, March 30 (Reuters) – Dollar dominance is sowing the
seeds of financial turmoil, and the solution is to promote new
reserve currencies, a Chinese government economist said in a
paper published on the eve of a G20 meeting about how to reform
the global monetary system.

Although not an official policy statement, the paper by Xu
Hongcai, a department deputy director at the China Center for
International Economic Exchanges, offered a window onto the
domestic pressures bearing on Beijing to move away from a
dollar-centric global economy.

The China Center, a top government think tank, has
represented the Chinese government in organising a forum on
Thursday in Nanjing that will bring together finance ministers,
central bankers and academics from the Group of 20 wealthy and
developing economies.

Xu’s paper, “Reform of the international monetary system
under the G20 framework”, was published in Chinese on the
center’s website this week (www.cciee.org.cn).

“Nations around the world have no way of restricting dollar
issuance by the Federal Reserve. The current international
monetary system lacks both stability and fairness,” Xu wrote.

He said the global monetary system had fallen into a “dollar
trap”. While it would be sensible to reduce dollar holdings in
official currency reserves, nations cannot easily cut back,
because doing so would only lead the dollar to weaken and so hit
the value of their assets, he said.

CHINA’S DILEMMA

China’s dollar dilemma is particularly acute, though Xu did
not say as much. China had $2.85 trillion in foreign exchange
reserves at the end of last year, more than any other country.
About two-thirds are estimated to be invested in dollars.

Beijing has repeatedly warned that loose U.S. monetary
policy threatens the dollar, but it has continued to accumulate
dollar assets at the same time, adding about $260 billion of
Treasury securities last year, according to U.S. data.

With the Chinese government determined to limit yuan
appreciation, it must buy a large amount of the dollars
streaming into the country from its trade surplus and recycle
those into U.S. investments.

Xu was not shy about proposing ways to remake the global
monetary system.

For a start, he said diversification was needed, with
several reserve currencies. Other countries could reinforce
these currencies’ status by buying or selling them to keep their
exchange rates stable, Xu said.

He said the International Monetary Fund should also play a
policing role.

“If any international reserve currency depreciates, the IMF
would be responsible for issuing a timely alert, increasing
international pressure to force the country in question to take
measures to stabilise its currency,” he said.

LITTLE SUPPORT

Xu’s call for regular intervention to keep key currencies
steady is unlikely to find much support among developed
economies, which have come to view a system of floating, largely
market-determined exchange rates as the most stable underpinning
of the global economy.

When the G7 rich countries banded together to weaken the yen
earlier this month, it was their first joint intervention since
2000 and came against the extraordinary background of
speculator-driven yen appreciation after Japan’s devastating
earthquake, tsunami and nuclear crisis.

Xu also suggested that the Special Drawing Right, the IMF’s
unit of account, should gradually be built into a global reserve
currency, although he noted this would still be a long time off.

Chinese central bank governor Zhou Xiaochuan said two years
ago that the SDR would be better than the dollar as a
supra-national reserve currency, disconnected from the interests
of any single country.

With France at the helm of the G20 this year, French
President Nicolas Sarkozy has seized on the SDR idea, promoting
it as a possible alternative to the dollar-led global monetary
order. But China itself appears to have cooled on the SDR,
instead describing it as a largely symbolic issue.

For all the defects in the global monetary system identified
by Xu, foreign officials, especially from the United States,
have said that China has a much easier solution within its
grasp.

By allowing the yuan to float freely, the Chinese central
bank would no longer need to buy dollars flowing into the
country and so could drastically slow its accumulation of
foreign exchange reserves.

(Reporting by Simon Rabinovitch; Editing by Ken Wills)

China economist blasts dollar dominance on eve of G20