News: (BBC) China suggests switch from dollar

The BBC has an article about requests by China to switch from the single-currency reserve system to a an IMF-backed reserve system.

The suggestion made by China is to move to a Special Drawing Rights (SDR) (IMF factsheet) unit of account. SDR’s are backed by a basket of currencies, predominantly the U.S. dollar at present (44% according to Wikipedia).

Currencies in the SDR will probably have artificial demand as components of the reserve currency, making them inherently more valuable than non-SDR currencies. This will increase purchasing power with SDR currencies (and increase the elasticity of seigniorage), but reduce exporting competitiveness.

A move to SDRs as a reserve currency ought to have adjustments to the percentage (and type) of the reserve currencies, based upon market forces. For example, as the U.S. dollar weakens relative to other currencies, its share of the SDR basket percentage should be adjusted downward – this is short-term pro-cyclical, but long term it should make the country more competitive for labour-driven exports.

At present the U.S. currency remains aloof and unresponsive to the U.S. high import-export ratio. There is partly because the U.S. dollar is the only reserve currency, and there is always demand for reserve (especially in times of volatility).