The surprise proposal by Beijing's central bank governor reflects unease about its vast holdings of U.S. government bonds and adds to Chinese pressure to overhaul a global financial system dominated by the dollar and Western governments.

The world economic crisis shows the "inherent vulnerabilities and systemic risks in the existing international monetary system," Gov. Zhou Xiaochuan said in an essay released Monday by the bank. He recommended creating a currency made up a basket of global currencies and controlled by the International Monetary Fund and said it would help "to achieve the objective of safeguarding global economic and financial stability."

Zhou did not mention the dollar by name. But in an unusual step, the essay was published in both Chinese and English, making clear it was meant for a foreign audience.

China has long been uneasy about relying on the dollar for the bulk of its trade and to store foreign reserves. Premier Wen Jiabao publicly appealed to Washington this month to avoid any response to the crisis that might weaken the dollar and the value of Beijing's estimated $1 trillion in Treasuries and other U.S. government debt.

For decades, the dollar has been the world's most widely used currency. Many governments hold a large portion of their reserves in dollars. Crude oil and many commodities are priced in dollars. Business deals around the world are done in dollars.

But the financial crisis has highlighted how America's economic problems — and by extension the dollar — can wreak havoc on nations around the world. China is in a bind. To keep the value of its currency steady — some say undervalued — the Chinese government has to recycle its huge trade surpluses, and the biggest, most liquid option for investing them is U.S. government debt.
To better insulate countries from the ills of one country or one currency, Zhou said the IMF should create a "reserve currency" based on shares in the body held by its 185 member nations, known as special drawing rights, or SDRs.
He said it also should be used for trade, pricing commodities and accounting, not just government finance.

Zhou also called for changing how SDRs are valued. Currently, they are based on the value of four currencies — the dollar, euro, yen and British pound. "The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies," he wrote.

Beijing has been unusually bold in recent months in expressing concern about Washington's financial management and pushing for global economic changes. That reflects both its relative financial health and growing concern that increased globalization means missteps abroad could harm its own economy.

Zhou's comments are also part of China's longstanding push to reform the IMF, World Bank and global financial system to give greater voice to China and other developing economies — another theme that will be heard at the G-20 summit from China, Brazil, Russia and India.

"Overdue reforms should give proper representation to and increase the say of the emerging and developing economies," Yi Xianrong, a researcher with the Institute of Economics and Finances at the Chinese Academy of Social Sciences, a government think-tank, wrote in the government newspaper China Daily.

"Proper representation and a bigger voice for the developing countries are the need of the hour. For instance, being the world's third-largest economy and the largest foreign reserves holder, China should get its due place in the monetary body."
Another idea Yi raised was that the U.S. and Europe should give up their traditional privileges of appointing the heads of the World Bank and the IMF.

The idea of a creating a new global reserve currency isn't new. But analysts say the proposal isn't likely to gain much traction because it faces major obstacles. It would require acceptance from nations that have long used the dollar and hold huge stockpiles of the U.S. currency.

"There has been for decades talk about creating an international reserve currency and it has never really progressed," said Michael Pettis, a finance professor at Peking University's Guanghua School of Management.
Managing such a currency would require balancing the contradictory needs of countries with high and low growth or with trade surpluses or deficits, Pettis said. He said the 16 European nations that use the euro have faced "huge difficulties" in managing monetary policy even though their economies are similar. "It's hard for me to imagine how it's going to be easier for the world to have a common currency for trade," he said.

================================

Cyberspies hack into U.S. fighter project: report

Tue Apr 21, 2009 1:58pm EDT

Lockheed says F-35 classified data not breached

1:58pm EDT

WASHINGTON (Reuters) - Computer spies have repeatedly breached the Pentagon's costliest weapons program, the $300 billion Joint Strike Fighter project, The Wall Street Journal reported on Tuesday.

The newspaper quoted current and former government officials familiar with the matter as saying the intruders were able to copy and siphon data related to design and electronics systems, making it potentially easier to defend against the plane.
The spies could not access the most sensitive material, which is kept on computers that are not connected to the Internet, the paper added.

Citing people briefed on the matter, it said the intruders entered through vulnerabilities in the networks of two or three of the contractors involved in building the fighter jet.

Lockheed Martin Corp is the lead contractor. Northrop Grumman Corp and BAE Systems PLC also have major roles in the project. Lockheed Martin and BAE declined comment and Northrop referred questions to Lockheed, the paper said.
The Journal said Pentagon officials declined to comment directly on the matter, but the paper said the Air Force had begun an investigation.

The identity of the attackers and the amount of damage to the project could not be established, the paper said.
The Journal quoted former U.S. officials as saying the attacks seemed to have originated in China, although it noted it was difficult to determine the origin because of the ease of hiding identities online.
The Chinese Embassy said China "opposes and forbids all forms of cyber crimes," the Journal said.
The officials added there had also been breaches of the U.S. Air Force's air traffic control system in recent months.
(Writing by Peter Cooney; Editing by John Stonestreet)