China’s Dollar ConcernsJanuary 28, 2011 - 8:42 AM | by: David Piper
The US dollar has been the dominant currency in Asia for decades.
Its strength has underpinned trade and given certainty as Asian economies grew.
The Hong Kong dollar has, for instance been pegged to the Greenback since 1983 despite pressures for it to float.
China has been accumulating the Greenback at an unprecedented rate over the past two decades since its economic rise because the vast majority of trade transactions continue to be in the dollar.
Its estimated China now has foreign exchange reserves of $2.85 trillion mainly denominated in U.S. dollars.
So China has a lot riding on the US dollar remaining strong and it doesn’t like it when US policies make it weaken.
China has increasingly complained about the Obama administrations plans to resuscitate the US economy by printing money.
The latest to raise concerns is Dagong, a Chinese sovereign debt-rating agency.
It’s warned that the US is effectively printing cheap dollars as it implements an ultra-loose policy to spur its weak economy.
And it also warned the US is setting the stage for “a world credit war” and “eroded the legitimacy of the global monetary system that takes the dollar as the key reserve currency.”
Dagong created controversy last year when it rated the United States at double-A, below China’s AA-plus, in July 2010.
It also downgraded the U.S. sovereign credit rating year, after the Fed decided to pump more dollars into the U.S. economy.
Dagong is thought to be independent of the Chinese government but many of its concerns mirror those of the country’s political leaders.
Chinese Premier Wen Jiabao has publicly voiced concerns about the weakening dollar because of the massive reserves of it the country holds.
The underlying concern in China it seems is that the US is trying to weaken its currency to cut the massive trade gap between the two countries because it can’t get Beijing to float its currency and let it appreciate.
Critics of China and its currency policies would argue that it serves it right if its reserves take a haircut.
But in Asia there are growing concerns that further frictions between the US and China over everything from trade to maritime borders could disrupt Asia’s economic renaissance.
The last time a major western power attempted to trade with China and had major difficulties was back in the 1830’s.
The British Empire wanted to open China to trade. They couldn’t find anything China wanted and finally seized on the dubious commodity of opium to sell to the Chinese masses.
That led to the Opium Wars and the burning of Beijing by British and French forces and Britain taking control of Hong Kong.
China and the US are far from any type of conflict but if the two countries can’t resolve their differences on trade then they could have unforeseen consequences that would shake the world.