Last week, most of us laughed when news broke that Russia was seeking an expansion of the IMF’s SDR. This week, China joined the call when the governor of its central bank, Zhou Xiaochuan, posted an essay on the topic on the People Bank of China’s website. Poor old Tim Geithner, the US Treasury secretary, was clearly wrong footed by the suggestion. His initial reaction, along with Federal Reserve Chairman Ben Bernanke, was to dismiss the idea, but he then backtracked and said it was worth considering. Responding to a question at a Council of Foreign Relations event in New York, he said: “As I understand it, it’s a proposal designed to increase the use of the IMF’s Special Drawing Rights. I am actually quite open to the idea.” The result was inevitable. The dollar got a kicking. The main beneficiary was the euro, which is rapidly assuming a new moniker: the anti-dollar.
While it is probably fair to debate just why China holds so many of its reserves in USD-denominated assets, it is possibly a dialogue that officials close to the US administration should avoid. But that didn’t stop the venerable Paul Volcker – who despite his dotage is a special adviser to Barack Obama – from stating: “They [China] ignore the fact that they didn’t have to buy those dollars in the first place, so they contributed to the problem.”