Word: dollarization
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...turn to show it's no pushover. In the G-20 run-up, Zhou Xiaochuan, China's central bank governor, published a paper suggesting that alternative global currencies, like Special Drawing Rights - a unit of exchange used by the International Monetary Fund - be considered to replace the U.S. dollar as the world's de facto reserve currency. While some Washington officials rejected the proposal as impractical, China's leaders have been taking steps to show just how nervous they are about a weaker dollar as the U.S. runs up massive deficits to shore up its crumbling economy and financial system...
...agreements are an unusual step for China, which has historically used U.S. dollars to conduct its external trade. But with some 70% of its $2 trillion in foreign reserves parked in the U.S. currency, China is searching for ways to diversify. Beijing's main concern is that the dollar will inevitably weaken, eroding the value of its holdings, due to the growing U.S. budget deficit that is expected to swell to more than $1.75 trillion in 2009, the country's largest debt load as a percentage of GDP since World War II. "This is the tip of the iceberg," warns...
...There have been other recent hassles with dollar-based trade. When U.S. financial institutions like AIG and Lehman Brothers began to disintegrate in 2008, global money markets were so roiled it became expensive for any trade to be done at all in dollars. "What precipitated [China's swap agreements] was the collapse of Lehman Brothers and the worries over trade financing at that time," says Johanna Chua, a regional economist with Citigroup in Hong Kong. "If the dollar is extremely volatile it costs more to hedge...
...what is the point of China issuing all these swaps? "This is a contingency plan in case the dollar implodes," says Fox-Pitt Kelton's Matthews. "It is a way of continuing trade with its major trading partners." Other analysts say China is trying to assert itself, through words rather than deeds, on the global economic stage by taking a step toward making the yuan a global currency. "A lot of this is symbolic," says Citigroup's Chua. "China wants to be a player." And one sure way to be a player, as everyone knows, is to threaten to quit...
...right? But, of course, they didn't. Why? The money. It was just too good to let us, the simple-minded investors, foolish enough to think this was all on the up and up, know too much, to raise concern, to cause trouble with perfectly legal, unregistered, multibillion-dollar funds that worked hard to stay under government radar. Legally, they didn't have to say a thing...