China is convinced that, long-term, the global monetary system dominated by USD is set for an inevitable transformation. However, China has no plans to challenge USD dominance directly, but to go at it step by step.
China has already begun the process of diversifying its foreign exchange reserve assets, pushing settlement in yuan with its trading partners, and pressuring the US government to be responsible in its fiscal policy.
The IMF will discuss a financing scheme through bond issues at the coming director's meeting. China says it is ready to buy up to $50 billion of such an issue. China has long urged IMF to raise more funds through market financing instead of through a political process.
Although many countries, including Russia and Brazil, are willing to settle bilateral trade with China in local currencies instead of USD, China is most interested in RMB settlement in trade with its Southeast Asian neighbors. Border trade with countries such as Vietnam is very active. China is promoting the establishment of a free trade zone, which will develop into a currency zone.
Recently, Malaysian Prime Minster Najib Tun Razak told Premier Wen Jiabao that his government might provide convenience to the bilateral trade by settlement of local currencies. The two sides may soon settle bilateral trade with their own currencies.
The People's Bank of China (PBoC) and Malaysia's central bank signed a currency swap agreement involving 80 billion yuan on February 8. PBoC has signed six currency swap agreements with monetary authorities of other countries totaling 650 billion yuan. According to these agreements, PBoC will receive other countries�currencies and inject them into China’s financial system, so Chinese firms will be able to borrow those currencies to pay for imported goods, avoiding exchange rate risk and cutting exchange expenses.
Meanwhile, China plans to organize a non-dollar currency circle with Southeast Asian countries. Zeng Peiyan, former Chinese Vice-Premier, said at the Boao Forum that China was willing to continue purchasing US national debt, but the US must also promise that the value of US national debt would be pegged to the inflation rate of USD.
Zheng Xinli, vice executive chairman of China Center of International Economic Exchanges, said Asian countries, especially supporters of US debt including China, India, Japan, and South Korea, should unite to deal with USD depreciation and pressure the US to make such a promise.
Zheng Xinli also recommended that Asian countries should jointly establish and fund two commercial banks to support infrastructure construction and agricultural development in Asia.
Meanwhile, China has suggested it would not continue to pile up US government debt without limit, despite urgings from the US government that it continue its purchases. Before the first Strategic and Economic Dialogue between China and the Obama Administration, to be held at the end of July, China is set on using its stake of US national debt in curbing US discussion of such areas as human rights.