China and US Dollar

China has the world’s largest foreign exchange reserves, valued at nearly $2 trillion, with more than half of those holdings estimated to be made up of United States Treasuries and other dollar-denominated bonds.

Now China is worried. It is concerned about the safety of those assets, particularly because huge economic stimulus plans could lead to soaring deficits in the United States, which could sink the dollar’s value, pulling down the value of Chinese investments.

Therefore, it is proposing a International Monetary Fund currency, based on a basket of international currencies, that is disconnected from individual nations and is able to remain stable in the long run.

This proposal, coming immediately after a similar proposal by the Russians reflects the Chinese worries, though it is cautious not to send wrong signals that could effect currency markets.

Though the dollar will not be replaced as the world’s dominant foreign exchange reserve anytime soon, the proposal suggests that China is preparing to assume a more influential role in the world.



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