January 27th, 2011 11:02 EST
China and Russia Drop US Dollar
Says international currency system is `product of the past`
China President Hu Jintau told the Wall Street Journal in Beijing, before the start of his visit to the United States last week, that the international currency system was "a product of the past," created a long time before the Chinese yuan was accepted as an international currency.
Hu also criticized the efforts by the U.S. Federal Reserve to stimulate the economy through buying $600 billion in U.S. Treasury debt, a policy the Fed calls Quantitative Easing 2, or QE2.
He told the Wall Street Journal the U.S. monetary policy "has a major impact on global liquidity and capital flows and therefore, the liquidity of the U.S. dollar should be kept at a reasonable and stable level."
The newspaper concluded that Hu Jintao comments suggest the dollar`s future "continues to concern the most senior levels of the Chinese government," in that loose U.S. monetary policy fuels inflation, with the risk that it will erode the value of China`s enormous foreign-exchange reserves estimated at $2.85 trillion at the end of 2010.
Red Alert continues to warn that these comments by China should be taken seriously.
China sees that the end of dollar dominance in international trade has already begun.
Now, China wants to secure a position for the yuan in the emerging new international currency system - a system that will end with the International Monetary Fund creating a one-world international currency in which the yuan will be a key currency defining the value of IMF Special Drawing Rights to be used as a dollar replacement.
China and Russia drop dollar
In November, Russia and China announced a decision to abandon the dollar in bilateral trade dealings, resolving instead to use their own currencies.
The decision resulted from a bilateral meeting in St. Petersburg, Russia, between Chinese Premier Wen Jiabao and his Russian counterpart, Vladimir Putin.
The Chinese yuan has now started trading against the Russian rouble in the Chinese interbank market, while the renminbi will soon be allowed to trade against the rouble in Russia, according to a report in the China Daily.
In the discussions, China agreed to purchase two nuclear reactors from Russia and prices similar to those the Russian gas giant Gazprom charges its European partners were set for the Chinese purchase of Russian natural gas.
The move marks a continued departure from utilizing the dollar as the standard of international trade, a position the dollar has held since the end of World War II.
"This latest move - a continuation in a series of efforts by both countries to move away from U.S. dollar usage in international trade - further threatens the dollar`s reserve currency status," Hao Li wrote in the International Business Times. "China and Russia are gradually revolting against the U.S. dollar."
China`s yuan now in IMB basket of currencies
Also last November, French President Nicolas Sarkozy proposed having the yuan enter the pool of currencies in the International Monetary Fund`s Special Drawing Rights, as a step to wean the international monetary system off its reliance on the dollar, Reuters reported.
"The smart thing for the IMF to do would be to put the yuan in the SDR basket today," Jim O`Neill, chairman of Goldman Sachs Asset Management, told Reuters. "Then the SDR would have some obvious appeal to the private sector: this could quite rapidly open the door to less dependence on the dollar."
According to Reuters, the SDR currently accounts for only 4 percent of global reserves, or $308 billion; the four currencies that make up the SDR - the euro, the Japanese yen, the pound sterling and the U.S. dollar - account for only 46 percent of world trade.
A five-year review of the SDR basket completed this month excluded the yuan because it is not freely traded on international currency exchanges; the admission of the yuan into the IMF basket comprising the SDR would be a major accomplishment for yuan and a major setback for the dollar.
Clearly, Russia, China and France all anticipate the coming day when the dollar will be abandoned as the global foreign-exchange currency and the standard for settling international trades.
China`s currency strength grows
On Oct. 14, 2010, Andrew Batson and Aaron Back reported in the Wall Street Journal that China`s foreign exchange reserves topped $2.648 trillion at the end of September, "in a record surge" that makes China`s foreign-exchange reserves the largest amount ever accumulated by any nation.
China`s reserves increased by $194 billion in the third quarter 2010, marking its biggest-ever quarterly gain.
Tensions with the Obama administration continue over China`s refusal to allow the yuan to freely float on currency-exchange markets.
The yuan has risen only about 2.3 percent against the dollar since June, and many U.S. politicians still view China`s currency as being kept intentionally undervalued, as part of China`s policy to boost exports.
China has repeatedly insisted its central bank will make only "gradual changes" in the exchange rate.
China cut its holdings of long-term Treasuries by $21.2 billion in June, reducing total Chinese holdings of Treasury debt to $839.7 billion, Bloomberg reported.
China has been diversifying its foreign-exchange reserves away from the dollar, in favor of the euro and gold, since June 2009, when China`s holdings of U.S. Treasury debt peaked at around $950 trillion.
Despite grumbling about how the Fed is debasing the dollar, China, the biggest holder of U.S. Treasury securities, boosted its holdings in September, for the third straight month, according to the Associated Press.
China`s holdings of Treasury debt rose to $883.5 billion in September, a 1.7 percent increase from August.
ABOUT YOUR GUEST: Jerome R. Corsi received a Ph.D. from Harvard University in political science in 1972. He is the author of the #1 New York Times bestselling books THE OBAMA NATION: LEFTIST POLITICS AND THE CULT OF PERSONALITY and the co-author of UNFIT FOR COMMAND: SWIFT BOAT VETERANS SPEAK OUT AGAINST JOHN KERRY. He is also the author of AMERICA FOR SALE, THE LATE GREAT U.S.A., and WHY ISRAEL CAN`T WAIT. Currently, Dr. Corsi is a Senior Managing Director in the Financial Services Group at Gilford Securities as well as a senior staff writer for WorldNetDaily.com.
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