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China says wants diversified FX but not pushing debate

(Agencies)
Updated: 2009-07-02 16:07

Wanted: Stable Dollar

"At present the US dollar is the main reserve currency," He said. "We of course hope the exchange rate of the main reserve currency maintains stability."

Chinese officials have expressed concern that massive US fiscal and monetary stimulus will generate inflation and drive down the dollar, handing Beijing big losses on its vast portfolio of US bonds.

Related readings:  G8 not likely to discuss reserve currency: analysts  Currency may take back seat in US talks  Vice FM: Unaware of G8 reserve currency request  China: key currency countries need watching  Currency reform, time and again

But these holdings also make China nervous about any tough talk that can drive down the value of the dollar, creating uncertainty about how aggressively it will press for debate on reforming the global currency system.

"There have been conflicting comments and this has been confusing the market," said Mitul Kotecha, global head of FX at Calyon in Hong Kong.

"We will see more diversification, but I don't think anything's going to happen quickly because it would almost be like shooting yourself in the foot."

The SDR proposal has not just been idle talk from China. The International Monetary Fund this week unveiled its long-awaited plan for issuing debt denominated in SDRs, and China has committed to purchase up to $50 billion of the notes, more than any other country.

At the G8 summit, Vice Foreign Minister He said China's focus will be on the financial crisis, with the hope that countries will be able to harness their policies to help the global economy recover as soon as possible.

"The international crisis is still spreading and overall the world economy is still facing difficulties," he said. "The outlook on whether the world economy can revive or when it will revive is still unclear."

He said China also wanted the summit to improve coordination between the Doha round of world trade talks and climate change negotiations. He said Beijing was worried that some countries might use global warming as a pretext for trade protectionism, imposing tariffs on exports linked to carbon emissions.

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