China is on the offensive. Long a bystander in international economic affairs, Beijing has in recent weeks announced a string of initiatives for remoulding the global financial system. And they all have one target - knocking the US dollar off its perch.
Last month, China said it hoped eventually to see the US dollar replaced as the main global reserve currency by a basket of significant currencies and commodities. Zhou Xiaochuan, head of the central bank, argued that the current dollar-based system was too vulnerable to financial crises.
China has set up a series of swap arrangements with other central banks, including Argentina, South Korea, Indonesia, Malaysia and Belarus, through which it will make its currency available to the other countries if they run out of foreign exchange.
This week's initiative involves trade. China and Brazil are to begin talks on a scheme for bilateral trade to be settled in the renminbi and the real, rather than the dollar. Beijing has found a willing partner in the Brazilian government, which mixes conservatism in economic policy at home with developing worldist flourishes abroad.
Big changes will not happen quickly. The dollar's position is the result of powerful economic realities, not the decision of a room full of bureaucrats. But China is putting down some important long-term markers and all of a sudden, the dry arena of international financial arrangements has become loaded with the symbolism of economic power shifting from west to east.
China's language may be impeccably multilateral but the goal is to boost its position in international economic affairs and limit space for the US to do its own thing.
Yet the curious thing about China's attacks on the dominance of the dollar is just how much they are motivated by short-term, domestic politics. And in the process, the really important questions about China's growth model and its future role are being pushed to one side.
The government has been stung by domestic criticism of its $2,000bn (euro 1,440bn, pound 1,250bn) in foreign exchange reserves, about 70 per cent of which are invested in US government securities.
Why is a country that is still poor, people are increasingly asking, lending so much money to a rich country - especially when officials warn constantly about a possible slump in the dollar. Beijing has also reacted angrily to anyone who suggests its huge build-up in foreign currency reserves contributed to the orgy of liquidity in global financial markets.
Some of the outrage is understandable - who does not believe that profligacy in the US was at the heart of the crisis? Yet China's huge exposure to the dollar is partly a trap of its own making.
If the Chinese currency had appreciated more rapidly in recent years, the economy might not have experienced such turbo-charged growth rates - but its reserves would not have exploded so quickly and the much-needed shift to domestic demand would be more advanced.
It is all very well for Beijing to criticise irresponsible behaviour in the US, but for China to run a current account surplus of 8-9 per cent of gross domestic product, as it has been doing, someone on the other side of the ledger must be running big deficits.
If China wants a bigger international role for its currency, it will have to make other difficult shifts. For a start, the renminbi is not yet fully convertible and there are still a battery of restrictions on bringing funds in and out of the country. Why would a Brazilian exporter to China choose to be paid in renminbi, when the dollar is so much easier to trade and hedge against?
China's international leverage would also be enhanced if it could lend money overseas in its own currency- to the US, for instance. But until China has a deep and open bond market where interest rates are set by the market and not the government, there will be only limited takers for such renminbi assets.
There are plenty of reasons for China to be cautious about such changes - after all, the financial crisis is unlikely to have made Beijing more comfortable about lifting its capital controls.
But if China really does want to promote the renminbi and reduce the space for US economic unilateralism, it is these questions - and not toothless agreements about using the renminbi for bilateral trade - that it needs to address.
Copyright The Financial Times Limited 2009
