Following a similar proposal by Russia, China called for the creation of a new international currency reserve to replace the dollar. The governor of the People’s Bank of China, Zhou Xiaochuan, said the International Monetary Fund could manage a new currency reserve system that would be more effective in “safeguarding global economic and financial stability.”

“The outbreak of the crisis and its spillover to the entire world reflect the inherent vulnerabilities and systemic risks in the existing international monetary system…

“The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.”

China holds nearly $2 trillion in foreign exchange reserves and the country is the world’s leading investor in United States government debt. Like other nations, China’s reserves are largely denominated in US dollars and earlier this month Chinese Prime Minister Wen Jiabao expressed fears about the safety of the assets.

The proposal is a further indication of Beijing’s worries over the long-term value of the country’s dollar-denominated foreign reserves. Nicholas Lardy from the Peterson Institute for International Economics argues that “it is a legitimate concern.”

“Chinese are quite concerned that the large U.S. government deficits will eventually lead to inflation, which will erode the purchasing power of the dollar-denominated financial assets which they hold.”

While countries will not be trading in their greenbacks for a new currency anytime soon, the calls reflect the growing frustration of the world’s rising powers and a desire to gain greater control over the international economic order. In Russia’s words, “the obsolescent unipolar world economic order” needs to be updated.

All this raises the question: would a new currency be a good idea?

For further analysis, check out the post by Andreas Seitz appearing in the Foreign Policy Association’s blog on China.

Photo from Daniel Acker/Bloomberg News. Graphic from the Wall Street Journal.