Thread: India Joins Russia, China in Questioning U.S. Dollar Dominance

China has only now proposed the SDR. They were talking about using RMB for trade. It did nit cut much ice. Then they teamed up eith Russia to come up with the SDR. China sure has the intentions of projecting the RMB in the future.
It's only concern right now is that it's holding $2 trillion.

One way it's offloading that is giving aid to smaller nations and buying natural resources

English is such a funny language as it can't tell the different between "loan" "aid" and "Credit"

Most of the aid is "loan" out to much larger nations, China actually give very little in form of "aid" to "small nations"

buying natural resources

There is only limited stock pile China can do before price itches up again. it is not a sub for actual money.

The move from the Dollar is very complex. It needs good idea, and good implementation.

China and the dollar

9 July [Economist] The dollar’s role as the world’s main reserve currency is being challenged .... In the build-up to the annual summit of G8 countries, which began on July 8th in the Italian city of L’Aquila, officials in China, Russia and India all called for an end to the dollar’s dominance in the international monetary system. Dmitry Medvedev, Russia’s president, declared on July 5th that the dollar system is “flawed”; his central bank has been reducing its dollar holdings. The People’s Bank of China (PBOC), China’s central bank, repeated its call for a new global reserve currency in June and is now taking the first steps towards turning the yuan into a global currency.

Beijing is particularly influential in this debate. The dollar accounts for 65% of the world’s foreign-exchange reserves ..., only slightly less than a decade ago and well ahead of the euro’s 26% share. Three-quarters of all reserves are in the hands of emerging economies; China alone holds one-third of the global stash.

So China has particular cause to worry that America’s massive printing of money in response to the financial crisis will undermine the value of its dollar reserves. There is much domestic anger about the potential losses China may face as a result of its lending to rich Americans. The government would like to diversify out of dollars: its new purchases of Treasury securities have fallen sharply this year. But any attempt to dump its stock of dollars would risk triggering a plunge in the currency. Instead, officials are mulling two ways out of the “dollar trap”: persuading the world to adopt a new global currency and encouraging the international use of the yuan.

In an essay in March, Zhou Xiaochuan, the governor of the PBOC, argued that basing the international financial system on a national currency will tend to exacerbate global imbalances. The dollar’s reserve-currency status let America borrow cheaply, causing the country’s credit and housing bubbles to persist for longer than they otherwise would have. Mr Zhou proposed that the world should replace the dollar with a global reserve currency, the SDR (Special Drawing Rights). Created by the IMF in 1969, and now based on the weighted average of the dollar, euro, yen and pound, the SDR was designed as a reserve currency but never took off. SDRs today add up to less than 1% of total reserves.

Under Mr Zhou’s plan the amount of SDRs would be hugely increased and the basket expanded to include other currencies, notably the yuan. Mr Zhou also proposes an SDR-denominated fund, managed by the IMF, into which dollar reserves could be exchanged for SDRs. Countries could then reduce their dollar exposure without pushing down the dollar (although it is unclear who would bear any exchange-rate losses).

Brazil, India and Russia have backed Mr Zhou’s proposal. But the SDR is unlikely to become a reserve currency any time soon. It would take years to develop SDR money markets that are liquid enough to be a reserve asset. Although the IMF’s executive board approved the first issuance of SDR-denominated bonds on July 1st, as the fund attempts to boost its resources, the bonds can only be bought and traded by central banks, not by private investors.

China’s alternative ploy is to promote the yuan’s use in international trade and finance. Starting on July 6th selected firms in five Chinese cities are now allowed to use yuan to settle transactions with businesses in Hong Kong, Macau and ASEAN countries. Foreign banks will be able to buy or borrow yuan from mainland lenders to finance such trade. In June Russia and China agreed to expand the use of their currencies in bilateral trade; Brazil and China are discussing a similar idea.

The PBOC has also signed currency-swap agreements with Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea. The central bank will make yuan available to pay for imports from China if these countries are short of foreign exchange. In another recent move, Hong Kong banks are now allowed to issue yuan-denominated bonds, a step towards building an offshore yuan market. ....

China’s Dollar Diversification Not Suitable for Japan, DPJ Says
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China?s Dollar Diversification Not Suitable for Japan, DPJ Says - Bloomberg.com
By Sachiko Sakamaki and Takashi Hirokawa

Aug. 3 (Bloomberg) -- Japan’s opposition shouldn’t follow a push by China to diversify foreign-currency reserves away from the dollar if it wins this month’s parliamentary election, Policy Chief Masayuki Naoshima said.

“I don’t think Japan can adopt policies that would prompt a drastic drop of the dollar or make other major changes during a global recession,” Democratic Party of Japan lawmaker Naoshima said in an interview in his office last week. “There may be various debates for the distant future.”

DPJ Secretary-General Katsuya Okada last month said the party has no plans to shift assets away from the dollar. His view contrasts with that of shadow finance minister Masaharu Nakagawa, who said Japan should buy new bonds issued by the International Monetary Fund as an alternative to Treasuries.

Japan is the world’s second largest holder of foreign- exchange reserves, with about $1 trillion. China’s reserves topped $2 trillion for the first time in the second quarter.

Chinese Premier Wen Jiabao said in March he was concerned U.S. borrowing to finance stimulus measures would erode the value of the $801.5 billion in Treasuries held by his nation’s investors. China and other countries are buying IMF bonds that will pay an interest rate pegged to a basket of currencies grouping the dollar, euro, yen and pound.

Naoshima also pledged to cut government bureaucracy in a DPJ government, echoing a policy platform released on July 27. The party will eliminate wasteful spending by tapping money from special accounts managed by the country’s bureaucrats and abolishing some tax deductions, according to the platform.

‘Big Government’

“Japan has a big government now if you include quasi- government entities,” said Naoshima, who is an upper house lawmaker. “We want to trim it while providing better social security.” The party will announce what it calls a fiscal rehabilitation plan in December, he said.

Prime Minister Taro Aso promised July 31 that his Liberal Democratic Party will boost economic growth to 2 percent by 2011 and increase disposable household income by 1 million yen in 10 years. The DPJ is favored to win this month’s election, according to a Yomiuri opinion survey published July 24.

To contact the reporter on this story: Sachiko Sakamaki in Tokyo at Ssakamaki1@bloomberg.net; Takashi Hirokawa in Tokyo at thirokawa@bloomberg.net
Last Updated: August 2, 2009 22:42 EDT

China to Use Yuan to Buy Bonds From IMF

China to Use Yuan to Buy Bonds From IMF - WSJ.com

By TERENCE POON and ANDREW BATSON

BEIJING -- China will buy bonds from the International Monetary Fund using the yuan, extending current practices where member nations make most of their contributions to the IMF in local currencies.

The IMF said Wednesday China has agreed to purchase approximately $50 billion worth of bonds denominated in Special Drawing Rights, a fundraising effort that is part of a broader push to bolster the IMF's resources. Brazil and Russia have also said they each intend to buy as much as $10 billion of bonds from the IMF, which hasn't issued debt before.

Many analysts had expected China would sell some of its more than US$2 trillion in foreign-exchange reserves to buy the IMF bonds, in order to reduce its exposure to the U.S. dollar. But according to the agreement posted on the IMF Web site, China will use its own currency.

That's in line with how member nations now pay for their quota contribution, which determines their voting rights in the IMF and how much they can borrow from the fund. Members pay 75% of their contribution in local currencies, and 25% in SDRs or major international currencies. But unlike a quota contribution, the bond purchase won't raise China's voting rights in the IMF.

The SDR is used as a unit of account in transactions between the fund and its member countries. Its value is based on a weighted basket of four currencies - the euro, the U.S. dollar, the Japanese yen and the British pound.

China is the first nation to sign an agreement to buy the bonds, a step that demonstrates the nation's growing financial clout. The IMF uses the money raised from member contributions in their various currencies as the basis for its lending to nations in financial distress.

The addition of the SDR-denominated bonds to China's assets should help the nation painlessly diversify its foreign-exchange reserves, the world's largest. U.S. dollar assets now account for a good portion of the reserves, but because China's positions are so large it would be difficult for it to switch out of the dollar and into something else without causing market turmoil.

In a research note, Barclays Capital economist Wensheng Peng said the yuan used for China's payment will eventually come back into China, as the funds are lent out to member nations who then convert them to major currencies such as the dollar.

China's purchase of 32 billion SDR worth of bonds will be staggered over time, the agreement says, with no more than 4 billion SDR worth purchased in any given week.

Write to Terence Poon at terence.poon@dowjones.com and Andrew Batson at andrew.batson@wsj.com