China joins call for ‘New World Order’

China calls for dollar to be replaced as global reserve currency
By Jim Puzzanghera
Los Angeles Times
(MCT)
WASHINGTON _ Five years after the U.S. financial crisis helped cause a deep global recession, foreign leaders are worried that history is going to repeat itself.
The fiscal impasse that has partially shut the federal government now threatens to trigger a U.S. default that would roil financial markets worldwide, leading an agitated China to suggest replacing the dollar as the international reserve currency.
“As U.S. politicians of both political parties are still shuffling back and forth between the White House and the Capitol Hill without striking a viable deal to bring normality to the body politic they brag about, it is perhaps a good time for the befuddled world to start considering building a de-Americanized world,” China’s official state-run news agency, Xinhua, said in an English-language commentary Sunday.
There is no viable alternative to the dollar as the centerpiece of the global financial system, and there probably won’t be for the foreseeable future, experts said.
But Washington’s debt limit standoff _ coming on the heels of similar brinkmanship in 2011 _ could accelerate efforts to find an alternative.
“The U.S. remains the core of the global financial system at this point,” said Nicolas Veron, a senior fellow at Bruegel, a think tank in Brussels. “But the sort of thing happening in the U.S. might move people toward a system less reliant on the U.S.”
China echoed calls from world financial officials urging an end to what it called the “pernicious impasse” in the U.S. over funding the government and raising the $16.7 trillion debt limit.
The Treasury Department has said the debt limit must be raised by Thursday or it will run out of borrowing authority. That would leave it dependent on just cash on hand and incoming revenue to pay the federal government’s bills. Given the world financial system’s dependence on the dollar, a default on payments of interest or principal on U.S. Treasury bonds would be catastrophic for the global economy, analysts said.
Treasury bonds and other dollar-based investments are used as the main form of collateral worldwide, so questions about their security would cause more problems than the financial system failures in fall 2008, said Benjamin J. Cohen, an international political economy professor at the University of California, Santa Barbara.
“It would make the Lehman Bros. episode look like a garden party by comparison,” Cohen said.
The U.S. debt limit standoff was the main topic at the recent meetings in Washington of the International Monetary Fund and the World Bank.
Global finance ministers are worried that the uncertainty surrounding a U.S. default “would mean massive disruption the world over, and we would be at risk of tipping yet again into a recession,” Christine Lagarde, head of the IMF, told NBC’s “Meet the Press.”
Most countries hold their foreign exchange reserves in U.S. dollars because the currency is viewed as the world’s most stable.
“The very fact that more than 60 percent of central banks’ reserves are in dollars gives them every reason to be concerned,” Barry Eichengreen, a professor of economics and political science at UC Berkeley and a former senior policy adviser at the IMF, said of foreign governments. “If the bank in which you held 60 percent of your savings was threatening to default, you’d be concerned too.”
U.S. financial markets rebounded Monday amid optimistic reports from Capitol Hill about negotiations between Senate Majority Leader Harry Reid, D-Nev., and Minority Leader Mitch McConnell, R-Ky., to end the standoff.
China is the largest foreign holder of U.S. debt, with about $1.3 trillion in Treasury bonds, and probably more in other dollar-denominated investments. So the Beijing government is worried about the effect of a U.S. failure to raise the debt limit on those holdings.
The Xinhua editorial took swipes at the U.S. for claiming “the moral high ground” while “covertly doing things that are as audacious as torturing prisoners of war, slaying civilians in drone attacks, and spying on world leaders.”
Although it slammed the U.S. for the Iraq war and military activity around the world, the article focused much of its fire on the U.S. role in the global economy, saying “the world is still crawling its way out of an economic disaster thanks to the voracious Wall Street elites.”
“Most recently, the cyclical stagnation in Washington for a viable bipartisan solution over a federal budget and an approval for raising debt ceiling has again left many nations’ tremendous dollar assets in jeopardy and the international community highly agonized,” Xinhua said.
The editorial called for a “a new world order” in which “all nations, big or small, poor or rich, can have their key interests respected and protected on an equal footing.”
That new order should start with respect for the sovereignty of other nations, the editorial said. It also should include major financial reforms, such as allowing developing and emerging economies to have more say in the operations of the IMF and the World Bank.
China has been pushing since at least 2009 for the dollar to be replaced as the world’s reserve currency. The nation has not only called for a new international currency to be developed but also has been taking steps to make its currency, the yuan, more acceptable as a potential alternative.
“They never lose an opportunity to take advantage of embarrassing behavior by the United States,” Cohen said. China made similar calls in 2011, when a debt limit standoff was resolved at the last minute.
But the Chinese currency and its financial system are not ready to be the world’s reserve currency, experts said. Even the euro and Japanese yen aren’t prepared to do that because they lack the liquidity of the dollar.
Still, the latest Washington crisis could push the world to seek ways to diversify the financial system away from its dependence on the dollar, Cohen said.
“The only thing that can hurt the dollar these days is political dysfunction in Washington. We’re shooting ourselves in the foot,” he said. “The more we play these games in Washington, the less confidence people will have in the dollar and the more incentive people will have to do this diversification.”
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