China Proposes a New International Medium of Exchange

"The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run."

— Zhou Xiaochuan, head of the People's Bank of China

Zhou Xiaochuan, head of the People's Bank of China, proposed the creation a new international reserve currency in an essay published on the central bank's Web site on Monday. The essay was published both in English and in Chinese, indicating they mean business. Zhou is expected to attend the Group of 20 meeting in London on April 2 where reform of the global financial system is on the table.

For most of the last century, the US Dollar has been the world's standard medium of exchange.  This has been an enormous boon to the US economy, especially in the last 30 years of trade deficits.  No other country in the world would be able to get away with importing more than they export, year after year.  The reason that Americans are able to do this is that other countries use the US Dollar as a medium for trade, so that stockpiling dollars and dollar-valued assets is seen as a safe haven.

The world's ability to absorb more dollars without hyperinflation is huge, but not unlimited.  The Bush Administration has been so profligate and irresponsible in expanding US debt that perhaps that limit is approaching.  China is the biggest foreign holder of dollars, and the nation with the largest US trade imbalance. China has been producing goods for US consumption, and receiving US treasury bonds in return.  In the last few years, China has begun to express doubts about the long-term value in its huge US holdings. 

This week's announcement is a bold next step. It remains to be seen whether China has the economic clout to force a change in the reigning system...or whether she will have to wait until next year.

New York Times article
Market Watch:  Geithner and Bernanke protest the idea