Zhou Xiaochuan, governor of the People’s Bank of China, released an essay in Chinese and English on Monday which called for a new currency reserve system to be implemented by the International Monetary Fund.
This move may be an indication of China’s increasing concern over their foreign exchange reserves which, valued at almost US$ 2 trillion, are the largest in the world. Of those assets, more than half are made up of U.S. treasury and other dollar-valued bonds.
In his paper, Zhou supported his request with what he claimed the current economic crisis has revealed as, “inherent vulnerabilities and systemic risks in the existing international monetary system.”
“Chinese are quite concerned that the large U.S. government deficits will eventually lead to inflation, which will erode the purchasing power of the dollar-denominated financial assets which they hold,” said Nicholas Lardy, an economist with a focus on China at the Peterson Institute in Washington. “It is a legitimate concern.”