China Advocates Global Currency

Many economists and financial experts have proposals for economic recovery and preventing another global financial crisis, but few proposals are quite as ambitious as one from China's Zhou Xiaochuan, the head of China's central bank.  In an essay posted yesterday on the bank's website, he proposed the creation of a universal currency.

This currency, according to Zhou, would be "disconnected from individual nations" and "not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity."  The International Monetary Fund (IMF) would regulate this system, which could begin by expanding the scope of Special Drawing Rights (SDRs), which are "baskets of currency" consisting of the U.S. dollar, British pound, Japanese yen, and Euro. 

SDRs today are primarily used as an account unit in the IMF and other international organizations, but a global currency could be built upon this foundation.  Zhou wants to expand the scope of the SDR by establishing a "settlement system between the SDR and other currencies" like the Chinese RMB that he says could expand its use to international trade and finance.

The timing of this proposal is not coincidental, as members of the G-20 are set to meet next week.  It also directly follows a similar proposition from Russia.  While it's highly unlikely that members of the G-20 will approve this measure, it definitely sends a strong message to the U.S.  Dollars comprise the bulk of China's nearly $2 trillion in foreign exchange, making it vulnerable to financial fluctuations in U.S. markets.   

We probably won't see any dramatic actions based on the statements of Zhou and others who advocate a universal currency in the short term, but proposals like this might be planting the seeds for more widespread changes down the road.