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China wants US to assume global duty of care for dlr

(Agencies)
Updated: 2009-06-15 16:30

BEIJING -- If you owe your bank $1,000 you have a problem, but if you've borrowed $1 million it's the bank that has the problem.

Going by that old maxim, then China, which has lent the United States upwards of $1.3 trillion, has a very big problem.

And China knows it. As a consequence, Beijing is diversifying its overseas investments and pressing US officials for an "exit strategy" from the ultra-loose fiscal and monetary policies that may eventually inflate away the value of China's US bond holdings and fell the dollar.

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But Chinese policymakers also know there is no practical alternative to the dollar as the world's main reserve currency.

Which is why bankers say any rhetoric from Tuesday's inaugural BRICs summit in Russia about the need for the United States to cede power in global financial institutions should not be taken as a signal that Beijing is positioning the yuan to challenge the dollar's supremacy.

The BRICs summit in the Urals city of Yekaterinburg will bring together the leaders of Brazil, Russia, India and China.

"We have seen the growing integration of the Chinese financial system into the global economy, and over time we will see a gradual enhancement of the role of renminbi," Charles Dallara, managing director of the Institute of International Finance (IIF), told a meeting of his group in Beijing last week.

"Will it replace the dollar?" Dallara asked. "The fact is that I don't think this is what Chinese officials want."

The SDR Feint

For sure, Zhou Xiaochuan, the governor of the People's Bank of China, caused a stir with an essay in March arguing that the Special Drawing Right, the International Monetary Fund's unit of account, might one day displace the dollar.

But diplomats and bankers who have recently visited the central bank say Zhou admits the proposal is unrealistic. They say his aim was to draw attention to concern about the safety of China's vast dollar holdings.

In particular, these people said, Zhou wanted to revive a debate over the so-called Triffin Dilemma.

Belgian-born economist Robert Triffin argued in 1960 that the United States could not supply enough dollars to satisfy the global appetite for reserves without triggering inflation, which in the long term would erode the dollar's value.

"Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries' demand for reserve currencies," Zhou wrote. "The Triffin dilemma ... still exists."

Concretely, bankers said Beijing was acting on its concerns by urging the US government to issue more Treasury Inflation Protected Securities. Unlike conventional bonds, TIPS shield their owners in the event of a rise in inflation.

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