Posted by: Dexter Roberts on May 19, 2009
It is just the latest sign that China and other developing nations are increasingly ready to challenge the currency status quo. Just before beginning his three-day visit to China, Brazilian president Luiz Inacio Lula da Silva raised waves when he said he planned to continue discussions with Chinese leaders about the possibility of dumping the dollar in trade between the two countries. Instead, the Chinese Yuan and Brazilian Real would be used for transactions, significantly lowering costs for the two nations, he said. His call was echoed by a Brazilian central bank official Tuesday, who said the two countries bank governors were likely to meet soon to push forward the proposal.
Following his meetings with Chinese president Hu Jintao and premier Wen Jiabao Tuesday, the second day of his visit, both Lula and his Chinese counterparts were mum on whether any progress had been made on the currency issue. But even a raft of announced financial agreements between the two nations—biggest news was China’s plan to lend $10 billion to Brazil’s Petrobras, while getting in exchange a guaranteed supply of Brazilian oil to the tune of 200,000 barrels a day for the next ten years—hasn’t generated as much interest as the possibility of this potential latest assault on the dollar.
And while economists say the likelihood of a real competitive alternative to the supremacy of the dollar remains far off, that doesn’t mean that agreements like the one being bruited between China and Brazil won’t emerge sooner. China for its part has already made clear its dissatisfaction with the currency situation. The first blast came on March 13 when China’s premier took a swipe at the U.S. “We have lent a huge amount of money to the United States,” Wen said at a press conference in Beijing’s Great Hall of the People. “I am a little bit worried. I request the U.S. to maintain its good credit, to honor its promises, and to guarantee the safety of China’s assets.” China, of course, has built up the world’s largest foreign reserves, totaling $1.95 trillion, with some two-thirds of that held in U.S. assets, mainly Treasuries.
That was followed by a March 23 call by China’s top central banker Zhou Xiaochuan to dump the U.S. dollar in favor of what he called a new “super-sovereign reserve currency.” The goal, Zhou wrote, is to “create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run.”
Brazil and China must build a “more just and fair international order,” the Brazilian president wrote in a commentary published in the official China Daily on Tuesday. Brazil and China have a “shared responsibility to help bring about the fundamental reforms in global governance that the world so urgently needs,” he wrote without mentioning the currency issue. Stay tuned for the next broadside aimed at the U.S. dollar.
BusinessWeek’s team of Asia reporters brings you the latest insights on business, politics, technology and culture from some of the world’s biggest and fastest-growing economies. Eye on Asia’s bloggers include Asia regional editor Bruce Einhorn, Tokyo reporter Ian Rowley, Korea bureau chief Moon Ihlwan, Asia News Editor and China Bureau Chief. Dexter Roberts, and Hong Kong-based Asia correspondent Frederik Balfour.