China's long march against the dollar

By purchasing $50 billion of new IMF bonds, the People's Republic is backing up talk with action

Published September 3, 2009 8:47PM (EDT)

Paging Michele Bachmann: China's insidious plan to knock the U.S. dollar from its perch atop the global economic system took another step forward on Wednesday, when the IMF announced that the country had agreed to buy $50 billion worth of IMF SDR bonds. China becomes the first nation to purchase the new IMF bonds, which the Fund sees as a source of cash in addition to pledges already made by members of the G-20 group of nations.

SDR stands for Special Drawing Rights, a synthetic currency used by the IMF to extend credit to emerging nations who are having trouble making their budgets balance. In March, China's central bank governor, Zhou Xiaochuan, made waves by suggesting that SDRs might make a nice replacement for U.S. dollars as the world's de facto reserve currency.

Realistically speaking, that won't happen any time soon. China doesn't even want it to happen soon. A sudden change in the dollar's status could lead to a precipitous fall in its value, which would end up hurting China, perhaps even more so than the United States, given China's huge holdings of dollar-denominated assets.

But China is taking the long view. By purchasing the IMF bonds with yuan, it is encouraging the yuan to circulate more broadly in the global economy, diversifying its foreign reserve holdings, and building its clout with the IMF. No disrespect to the dollar necessarily intended, despite Bachmann's worst nightmares -- just the kind of steps any sensible aspiring economic superpower might be expected to take.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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