Currency Misdirection from Beijing

Derek Scissors / March 26, 2009

A paper by Chinese central bank chief Zhou Xiaochuan — arguing the world should move off the dollar system — has attracted much attention. Like so many economic stories involving the PRC, there is less here than meets the eye.

It is hardly a new thought. Beijing has wistfully imagined for almost a decade a future where the dollar has been replaced, most prominently when it claimed (falsely) to have decoupled from the dollar in July 2005.

There are gigantic practical problems Zhou is well aware of. Any sudden move off the dollar would destabilize a tottering world economy and, in fact, sharply reduce the value of China’s huge stash of foreign reserves. But a slow shift away from a dollar system risks creating competing currency blocs, which are historically associated with the length of the Great Depression and the ensuing war. (more…)