Year of the big stick

In most western countries, the head of the central bank owes his appointment to the government but retains a fierce independence from it in matters of governance and policy


It’s not like that in China where Zhou Xiaochuan, governor of the People’s Bank of China, is on a mission, carefully co-ordinated with the government, to have the greenback replaced as the world’s reserve currency.

As China (and Asia’s) top central banker sees it, the termination of the dollar’s nearly century-old supremacy doesn’t have to be effected absolutely at this minute, just so long as the process starts now. No ifs, no buts. He wants a “super-sovereign currency” that basically sidelines the dollar, very much like Keynes’ still-born bancor, and removes all the settlement uncertainty associated with a tarnished greenback.

So saying, Dr Zhou, other POBC luminaries and senior members of the government from premier Wen Jiabao down have been conducting a nearly year-long campaign against the greenback with increasingly pointed speeches and back-room diplomacy to get their way.

It all started of course with the financial meltdown that threatened the value of China’s gargantuan storehouse of US government paper – in effect, dollars. At last count this amounted to more than a trillion, prompting Nobel prize-winning economist Paul Krugman to describe China as the “T-bills republic”.

Dr Zhou is clearly disgusted with the fiscal management of George Bush’s administration. Author of ten books with a PhD in systems engineering, married to Li Ling, a legal authority on China’s trade disputes with the US, he cites a string of made-in-USA causes. It’s the usual list of suspects including “lax lending standards”, “excessive leverage”, and “frivolous development of derivative products”.

China’s diplomatic offensive started in Buenos Aires last September when the POBC’s deputy governor Hu Xiaolian made some unusually candid observations about how the “continuous depreciation” of the dollar was hurting China by driving up its domestic inflation.
Applying more pressure, vice-premier Wang Qishan entered the fray three months later at the fifth Sino-US strategic economic dialogue in Beijing when he effectively warned the Fed to ensure the safety of China’s dollar-denominated assets. Other Asian nations owning billions of T-bills are firmly in his camp.

China turned the screws again in March. Around the G20 in London, the premier remarked that “we have lent a huge amount of money to the US” and, “to be honest, I am a little worried”. These carefully calibrated remarks were widely reported, as intended.

Around the same time Dr Zhou weighed in again, for the first time calling for the dollar to be replaced with nothing short of a new global monetary order. “An international monetary system dominated by a single sovereign currency has intensified the concentration of risk and the spread of the crisis,” he said.

Right on cue, the government-controlled China Daily followed up with a public debate in its own pages. Sample contribution: “The demise of the US$ [sic] will only expedite the dismantling of US global tyranny.” The newspaper regularly publishes stories on economists who support the super-sovereign cause.

Dr Zhou’s latest broadside came at a global think tank in July when he blamed “rich people in the high-income countries [who] have consumed beyond their means”.

This salvo followed soon after legendary American central banker Paul Volcker attempted to pour oil on the waters in a speech in Beijing. In this, the chairman of Obama’s economic recovery advisory board, while conceding that a world currency was the “ultimate logic”, insisted “there are no practical alternatives today, or for many tomorrows, to the US dollar as an international currency,” he said.

That’s not exactly what Dr Zhou and his government want to hear. Make that Years of the Big Stick.