Fall out from massive spending: China wants new reserve currency

Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.

“This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC.

Although Mr Zhou did not mention the US dollar, the essay gave a pointed critique of the current dollar-dominated monetary system.

“The outbreak of the [current] crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system,” Mr Zhou wrote.

China has little choice but to hold the bulk of its $2,000bn of foreign exchange reserves in US dollars, and this is unlikely to change in the near future.

To replace the current system, Mr Zhou suggested expanding the role of special drawing rights, which were introduced by the IMF in 1969 to support the Bretton Woods fixed exchange rate regime but became less relevant once that collapsed in the 1970s.

Today, the value of SDRs is based on a basket of four currencies – the US dollar, yen, euro and sterling – and they are used largely as a unit of account by the IMF and some other international organisations.

I have a prickly feeling in the back of my head that this has been one of the goals of Obama's reckless spending all along. By removing the dollar as the major reserve currency for governments, it will be harder to finance our debt. And, as the Chinese fear, the US would get to repay its obligations in inflated currency which would make it easier to reduce the $11 trillion national debt we will have by 2012.

Or perhaps, as has happened in other countries, we will wake up one morning and the government will announce all dollars will have to be exchanged for the "new dollar" - at 92 cents on the dollar or whatever amount is deemed necessary. This is not very likely at this point but who can foretell the future with this crew pouring trillions of fantasy dollars into the economy?