China yesterday threw down a challenge to America’s 50-year dominance of the global economy as it proposed replacing the dollar as the world’s main reserve currency with a new global system under the control of the International Monetary Fund.

In a muscle-flexing move that will be seen as an attempt to exploit the big shifts in economic power created by the recession sweeping the West, Beijing said that the dollar’s role could eventually be taken over by the IMF’s so-called Special Drawing Right (SDR), a quasi-currency that was created in 1969.

The audacious proposal emerged in a speech by Zhou Xiaochuan, Governor of the People’s Bank of China, published on the central bank’s website. Unusually, the remarks were released in English as well as Chinese, emphasising China’s dissatisfaction with the global primacy of the dollar.

However, the comments high-lighted China’s growing confidence in its place at the high table of the world’s most important economies, as much as any real expectation that such an unusual suggestion would gain traction. They came with little more than a week left until leaders of the world’s most powerful economies meet at the G20 London summit.

Mr Zhou argued that the SDR has the potential to act as a “super-sovereign” reserve currency, spanning national jurisdictions. In turn, he suggested that this could not only eliminate the risks associated with paper “fiat” currencies, such as the dollar and pound – which are backed only by the credit of the issuing country, rather than by gold – but would make it possible to manage global liquidity and imbalances more effectively.

Deep-seated global imbalances that sowed the seeds for the present economic crisis are blamed in large part by many economists on the dollar’s status as a reserve currency. Critics say that this allowed the US to live beyond its means, with the dollar’s reserve status enabling it to finance huge current account deficits by selling billions in Treasury bonds to countries running a current account surplus, such as China.

“The price is becoming increasingly high, not only for the users, but also for the issuers of the reserve currencies,” Mr Zhou said. “Although crisis may not be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.”

He diplomatically avoided referring to the dollar. But he said: “The role of the SDR has not been put into full play due to the limitations on it allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system.”

Mr Zhou suggested a shift by which the SDR could form the anchor of a new global exchange-rate system, replacing the former Bretton Woods system of fixed but adjustable exchange rates, which collapsed in 1971. Since then, most large Western economies have had floating currencies, while nations such as China have managed their exchange rate, creating incompatibilities blamed for stoking up the damaging imbalances.

“When a country’s currency is no longer used as the yardstick of global trade, and as the benchmark for other currencies, the exchange-rate policy of the country would be far more effective in adjusting economic imbalances,” Mr Zhou said.

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