China on Monday proposed a sweeping overhaul of the global monetary system, outlining how the dollar could eventually be replaced as the world's main reserve currency by the International Monetary Fund's Special Drawing Right.
The S.D.R. is an international reserve asset created by the I.M.F. in 1969 that has the potential to act as a super-sovereign reserve currency, Zhou Xiaochuan, governor of the People's Bank of China, said in remarks published on the central bank's Web site.
The role of the S.D.R. has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system, he said.
Mr. Zhou diplomatically did not refer explicitly to the dollar. But his speech, issued exceptionally in English as well as Chinese, spelled out Beijing's dissatisfaction with the primacy of the U.S. currency, which Mr. Zhou says has led to increasingly frequent global financial crises since the collapse in 1971 of the Bretton Woods system of fixed but adjustable exchange rates.
The price is becoming increasingly high, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws, Mr. Zhou said.
Jim O'Neill, chief economist at Goldman Sachs in London, said the dollar-based system of floating exchange rates had demonstrated great flexibility down the years.
But over time, as the world is taken off the steroids of the overleveraged U.S. consumer, you can't have the same dollar dependence as we have had. But who can provide it? And the answer is, if it functioned properly, maybe the S.D.R. could have a much bigger role, Mr. O'Neill said.
A super-sovereign reserve currency would not only eliminate the risks inherent in fiat currencies like the dollar Â— which are backed only by the credit of the issuing country, not by gold or silver Â— but would also make it possible to manage global liquidity, he said.
When a country's currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, he said, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.
Reform of the international monetary system is likely to take a back seat to the more urgent task of economic and financial stabilization when leaders of the Group of 20 developed and emerging economies meet in London on April 2.
But Mr. Zhou's speech shows that the issue is a pressing one for China, whose top officials regularly bemoan the volatility of the dollar and what they see as U.S. economic mismanagement.
Creating a new, widely accepted reserve currency may take a long time, Mr. Zhou acknowledged. It would be a bold initiative that requires extraordinary political vision and courage.