China officials call for displacing dollar, in time

Tired from 4th of July activity, readers are looking over this article

http://www.reuters.com/article/ousiv/idUSTRE5650WO20090706?virtualBrandChannel=11569&pageNumber=1

Here are the relevant parts, with comments below:

BEIJING (Reuters) - The financial crisis has laid bare defects in the dollar-led global economy and the world should look to displace the U.S. currency, even if that will take many years, Chinese officials said in comments published on Monday...

The Special Drawing Right (SDR), a unit of account used by the International Monetary Fund, presents a viable alternative to the dollar as a global reserve currency, said Li Ruogu, chairman of the Export-Import Bank of China, a major state-run bank.

"It is a feasible plan to reform the present SDR and make it into a real settlement currency, a universally accepted 'currency basket' that would replace the dollar at the heart of the monetary system," Li was cited as saying in Financial News, a newspaper published by the central bank.

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"The financial crisis caused the global economy to suffer heavy losses and it also let us clearly see how unreasonable the current international monetary system is," Li, a former central bank vice governor, said.

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INTERNAL TENSION

The tension between China's vision for a radical overhaul of the global financial system and its big stake in the existing order has been on display in the run-up to the G8 summit, which starts on Wednesday in Italy.

China holds an estimated 70 percent of its $1.95 trillion in official foreign exchange reserves in the dollar and is wary of saying anything that would undermine the value of its investments.

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Officials from other countries who will attend this week's G8 summit have said that Beijing has asked for discussion there about the future of reserve currencies. He Yafei has said that he was unaware of China making such a request.

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"When a country that issues a reserve currency has a long-term trade deficit, then that currency is no longer suitable to be a reserve currency and the process to replace it should start," he was quoted as saying by local media.

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Sources involved in preparation of the meetings said Brazil and India backed Beijing's call for debate but there was consensus among the G8 countries, at least, that nothing of significance could or should materialize at this stage.

What we have here is a dilemma: A situation with two or more outcomes. One bad, but the other(s) worse.

If China were to announce that they were no longer going to buy US Treasuries, then that would have an immediate and negative impact on their dollar holdings. But if China were to continue down the road that they have been on (buying US debt so to finance US Deficit spending), then they know that they (eventually) would be in deeper when it all collapses.

So what does China do? Keep buying US debt while at the same time moving behind the scenes to move away from the US dollar as the reserve currency. They aren't ready for that to happen yet, but they see where everything is headed and want to limit the damage to themselves as much as possible.

Also keep in mind the fact that China is reeling from the US consumer's decision (some voluntarily, others not) to stop spending as evidenced by the 7% savings rate. Millions of Chinese peasants have been thrown out of work (with no safety net, I might add) and are having to decide to go back to the farm or wait for another job to open up somewhere. That is why the Chinese stimulus package was passed. It has nothing to do with the world economy. It has everything to do with keeping 50 million people employed and not wanting to change things.