24 March 2009

China Calls for IMF Reform

The Governor of the People's Bank of China called for the IMF to increase the use and attention to SDR - Special Drawing Rights. SDRs were created in 1969 by the IMF as a support system - or reserve asset - for the world's currencies. It is not a currency but rather a backup system for IMF members. They can use it as a potential claim on those currencies that are freely usable by IMF members.

The Governor criticised the dollar and its current status as the only reserve currency of the world. According to him, the US currency's price is has become too high for users and for those that issue reserve currencies.

The relationship between the US and China is very important but the trade deficit has increased massively in recent years and the war of words between the nations has continued to rage.

The reliance on SDRs has lessened since they were created in 1969, and with the floating exchange rate system which came into play for the major currencies after the collapse of the Bretton Woods system.

The managing director of the IMF himself has said that the constant reliance on fiscal stimulus will not help to fix the world crisis, and that countries need to repair their banking systems before increasing funding.

But at the G20 summit in April, nations are planning to increase funding by a hefty amount, which goes against both the IMF head and the Chinese argument.

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