China's President: Dump Dollar for Yuan as Global Currency

Tuesday, 18 Jan 2011 09:12 AM

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On the eve of a U.S. visit, Chinese President Hu Jintao made the boldest statement yet on the future of the U.S. dollar as a reserve currency, calling the current global monetary exchange system “a product of the past” while promoting his own country’s currency as a replacement.

In written answers to questions from U.S. media, Hu roundly criticized the U.S. Federal Reserve for unleashing a wave of dollars into the world, prompting sharply rising inflation in places like China and India.

He also rejected the common U.S. complaint that China holds the value of the yuan artificially low to promote exports to support its own rise.

He called on changes to the currency reserve system in place today "to fully reflect the changing status of developing countries in the world economy and finance," reported The Wall Street Journal.

As to the Fed, Hu said that an increased supply of U.S. dollars "has a major impact on global liquidity and capital flows and therefore, the liquidity of the U.S. dollar should be kept at a reasonable and stable level."

The Chinese leader went so far as to suggest an overhaul of the monetary regime in place since the Bretton Woods accord at the end of World War II, creating instead system that is more "fair, just, inclusive and well-managed."

Hu’s stance is a dangerous one to both the United States and to China, considering that a wholesale move by major foreign holders out of U.S. dollar investments would destroy trillions in their foreign reserves while thumping the U.S. economy with much higher borrowing costs.

China’s foreign reserves reached $2.85 trillion in 2010, a total heavily weighted in U.S. dollars in the form of Treasury bonds.

Oil prices, a huge component along with food in rising inflation worldwide, are seen breaking $100 a barrel soon with no sign that major products will hit the brakes. U.S. consumers could see a quick return to $4.50 a gallon gas, slowing the recovery.

Merrill Lynch commodity analyst Sabine Shels told Reuters that the breaking point for the global economy is $120 a barrel, which would mean energy had risen to 9 percent of the total economy.

"Whenever the size of the energy sector in the global economy reached 9 percent, we went into a major crisis," said Schels.

Oil touched $147 in July 2008 just as the market began its historic recent plunge.

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