Unfortunately, it seems that there is still no consensus among various countries about the source of the financial crisis," he said.

TO BE NOTED: From Reuters:

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BOAO, China (Reuters) - Chinese Premier Wen Jiabao said on Saturday that the economic polices of countries which issue global reserve currencies require closer supervision as part of building a diversified international monetary system.

Wen and central bank governor Zhou Xiaochuan also cautioned against jumping to the conclusion that China is already on the path to economic recovery, after data issued on Thursday showed signs of an upturn in momentum.

Wen's currency comments, an apparent reference to U.S. economic management that Beijing has blamed in part for the global financial crisis, were twinned with a pledge to promote more international use of the Chinese yuan.

Wen did not mention the United States by name but he has expressed concern in recent months about the safety of Chinese investments in U.S. dollar assets.

"We should strengthen the supervision of the economic policies of the main reserve currency economies and push forward the establishment of a diversified international monetary system," he said in his opening address to the Boao Forum for Asia, held annually in the Chinese island province of Hainan.

It was the second time this month that China has made such an appeal, following President Hu Jintao's call at the London G20 summit earlier this month for the International Monetary Fund to strengthen its oversight of reserve currency-issuing economies.

LONG-TERM SOLUTIONS

China caused a stir in March when central bank chief Zhou floated the idea of reducing reliance on the U.S. dollar as the world's primary unit of foreign exchange by developing the Special Drawing Rights (SDRs) issued by the IMF.

But at the London G20 forum, China did not call for immediate discussion of the subject.

Speaking at the Boao forum on Saturday, Zhou said that his proposal on SDRs was intended mainly to contribute his thoughts on the root cause of the financial crisis and what needed to be done in the long run to prevent such situations in the future.

He was not suggesting that drastic changes to the financial system needed to be taken in the short term, Zhou said.

"It's just like treating a patient. First we need to make a diagnosis. Then comes treatment," Zhou told the forum.

"But right now, not all the doctors have the same diagnosis.... Unfortunately, it seems that there is still no consensus among various countries about the source of the financial crisis," he said.

Premier Wen said China would look at expanding its currency swap agreements that are seen as a step toward eventually making the yuan more of a global reserve asset.

"We should give full play to bilateral currency swap agreements and will study expanding currency swaps in scale and to more countries," he said.

China's central bank has signed six swap deals since mid-December, totaling 650 billion yuan ($95 billion), with countries from Argentina to Indonesia.

The yuan's international potential is sharply constrained by its limited convertibility, an issue that Wen did not broach.

STRONG CHINA

Wen highlighted China's relative strength in the face of the global financial crisis and told the audience of Asian government and business leaders that Beijing stood ready to support other countries through the difficult times.

"A series of economic stimulus measures adopted by China have shown initial results and there have been positive changes in economic performance, which has been better than expected," he said.

His wording was nearly identical to that at a State Council, or cabinet, meeting this week after China said its economy grew at 6.1 percent in the first quarter from a year earlier.

While that was the weakest quarter in year-on-year terms since records began in 1992, analysts said it represented a rebound in quarter-on-quarter growth.

But Wen also said that China would still err on the side of the caution, sticking to its active fiscal policy and moderately loose monetary policy -- which, in practice, have meant a surge in government spending and bank lending.

"We would rather over-estimate the severity of the situation and fully consider difficulties in making longer-term preparation for bigger difficulties," he said.

Central bank governor Zhou also emphasized that, even though there were positive signs that the economy is starting to recover, China is still in the stage of struggling against the global economic slowdown and financial crisis.

"The situation of the crisis is changing constantly. We need to tweak our policies in line with the changing stage of the crisis," he said.

Liu Mingkang, chairman of the China Banking Regulatory Commission, added at Boao that he was cautiously optimistic about the economic outlook and thought banks had adequate provisions to cover any potential rebound in bad loans.

Zheng Xinli, a senior Communist Party adviser, told reporters in Boao that he thought the economy had already hit bottom and would start to pick up steam in the second quarter.

But asked if the government would be able to hit the 8-percent GDP growth target for the year, Zheng said: "I think it is not guaranteed.

($1=6.832 Yuan)

(Additional reporting by Michael Wei in Boao and Aileen Wang in Beijing; Writing by Jason Subler and Simon Rabinovitch)"

a claim, or even simply an IOU. The current composition is USD 44%, EUR 34%, JPY 11% and GBP 11%

TO BE NOTED: From Shadow Bankers:

"Michele Bachmann and SDRs

By Ranjan X. Roy

Michele Bachmann (R-MN), best known for her views on “re-education camps” and McCarthyism, recently introduced a “resolution that would bar the dollar from being replaced by any foreign currency,” in response to Chinese comments regarding the potential use of SDR’s as a global reserve currency. When I paused to evaluate the resolution, visions of Freedom Fries danced through my head.

Rather than addressing the vital impact currency reserves and related policy have had on the current crisis and our future prosperity, Bachmann’s “legislation” was an absurd digression rooted in paranoia. Bachmann articulated her fears on the Glenn Beck show:

What that means is that all of the countries of the world would have a single currency. We would give up the dollar as our currency and we would just go with a one world currency. And now for the first time, we’re seeing major countries like China, India, Russia, countries like that, calling for a one world currency and they want this discussion to occur at the G20… Once you lose your economic freedom, you lose your political freedom. And then we are no more, as an exceptional nation, as we always have been. So this is imperative.

Central banks and monetary authorities globally have accumulated more than $6 trillion of currency reserves as of 2007, with 63.9% being held in USD. While the mechanics and history of reserve currencies are complicated, what is certain is the massive increase in USD reserves held by nations like China is a vital issue of economic policy that must be addressed to bring longer-term global prosperity into balance.

To be clear, no one, including Geithner, Zhou Xiaochuan (the Governor of the People’s Bank of China), or Obama, has ever suggested replacing the currency of individual nations with a single global currency akin to the Euro for the EMU. What is being addressed is the critical issue of how to manage the risk involved with USD volatility and its effect on FX reserves. Governor Zhou, prior to the G20 meeting, simply indicated that:

The role of the SDR 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.

It is crucial to note the non-committal nature of the statement, which does not even regarding SDR’s as the light at a proverbial “end” of the tunnel in monetary policy reform. What Zhou is addressing are the risks involved with a global reliance on USD as a reserve. China, after a decade of keeping an artificially weak Yuan to promote export growth, has suddenly found itself in the position of being tremendously “long” on the USD via currency intervention (they bought USD assets to artificially keep the CNY weak, thus keeping their exports to the US cheaper). Monetary growth in the US, inflationary by its nature, could have a negative impact on their assets, and China has naturally begun to address the issue.

Zhou’s reference to SDR’s as a potential replacement was the key that turned on the paranoid Bachmann engine. SDRs, or Special Drawing Rights, are a tool traditionally utilized by the IMF. It is crucial to understand that SDRs are a specific and logical tool used by the IMF to create a better system of debt issuance when they step in to help countries. IMF loans are denominated in SDRs to control for major currency volatility (i.e. the EUR/USD exchange rate) for loans to emerging nations. Rather than having the loan denominated in one specific currency, the loan is denominated against a basket of currencies. This prevents situations such as Argentina receiving a loan from the IMF in USD, the USD depreciating against the EUR, and Argentina now finding itself impaired from purchasing goods from Europe, through no actions of its own.

A SDR, as defined by the IMF’s website, is not actually currency, but rather a claim, or even simply an IOU. The current composition is USD 44%, EUR 34%, JPY 11% and GBP 11%. The mechanics from the IMF website indicate that the borrowing nation would be able to use the SDR to claim any currency issued via “voluntary exchanges” or IMF designation of partners. The SDR certificate that the borrower holds would now have limited currency volatility, but could be used if the borrower requires hard reserve currency by arranging a swap with a participating central bank:

[T]he SDR has only limited use as a reserve asset, and its main function is to serve as the unit of account of the IMF and some other international organizations. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions.

SDRs are a specialized, but useful tool in creating a more stable borrowing environment for troubled economies. However, the Bachmann Paranoia Meter should remain on low alert for now, as the logistics and political implications of a sudden switch from the USD as the world’s reserve currency make it very unlikely in the short term. First, China cannot afford a sudden flight from the USD as it would tremendously impact their own assets. Second, a SDR is simply a tool Governor Zhou provided as an example of international cooperation resulting in a more stabilized market environment, not China’s master tool to end US power. Third, as the SDR is not a traded currency, we are light years away from a system that could easily trade goods like oil or gold via an international reserve unit. The system in place is extremely limited and requires explicit exchanges between “voluntary” IMF partners. The logistics involved in setting up a system that could manage these transactions, considering the trillions of dollars of currency exchanged daily, is somewhat inconceivable. Finally, the US is still a dominant force behind both the IMF and global monetary policy, and is in no danger of being shut out of any decisions made related to monetary reform.

The issues that have arisen from the global dependence on the USD as a reserve unit have made clear this is an issue that will continue to be addressed in the coming decade. Rather than “world government” ranting, this is an opportune time where competing governments have a shared interest in a lack of volatility or any sharp market adjustments and should work towards creating a more stable global monetary system.

(Note: The G20 meeting held post the initial SDR hoopla saw important developments related to the issue that will be addressed in a follow-up post.)"