Chinese leader challenges future role of US-dollar

China’s president Hu Jintao only arrives in Washington on Tuesday but he is already proving to be a headache for his American hosts by bluntly criticising the present US-dollar-dominated global currency system as a “product of the past.”

Analysts said Hu’s comments to the US media show China will continue to take steps to turn the yuan into a global currency.

Chinese economists say the dollar’s status as a reserve currency allows it to live beyond its means, enabling it to finance huge current account deficits by selling billions in Treasury bonds to countries running a current account surplus, such as China.

US investors cheered the Federal Reserve’s decision to pump more than 1 trillion new dollars into the economy at the height of the recession, but the Fed’s loose monetary policy exasperated Beijing as it devalues China’s considerable $2.85 trillion US dollar portfolio.

Beijing feels it is also fuelling runaway inflation in Asia.

“The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level,” said Hu.

Hu made his comments in response to written questions from the Washington Post and the Wall Street Journal, but declined to address questions on imprisoned Nobel Peace Prize winner Liu
Xiaobo, China’s growing naval power and complaints about Chinese cyber attacks.

Hu also finessed his response to a question about disputes between China and its neighbours.

China has been muscle-flexing in India’s neighbourhood and also throwing down a challenge to America’s 50-year dominance of the global economy.

Hu reiterated China’s belief that the 2008 economic crisis reflected “the absence of regulation in financial innovation” and the failure of international financial institutions “to fully reflect the changing status of developing countries in the world economy and finance.” He called for an international financial system that is more “fair, just, inclusive and well-managed.”

Obama, on his part, will convey America’s unhappiness to Hu on Wednesday about China unfairly boosting its exports by undervaluing the yuan, making its products cheaper overseas.

Trade will dominate the visit but for the protocol-obsessed Chinese leadership, the highpoint will be Wednesday’s lavish state dinner —- an honour denied to Hu on his last trip to the White House in 2006.

Former president George Bush, who decided countries were simply “with us, or against us,” thought state banquets should be reserved for allies and like-minded powers like India and instead slipped Hu a lunch.

Of course, the snubbed Chinese leader had even more reason to seethe when a US state department announcer incorrectly called China “The Republic of China,” the formal name of democratically ruled Taiwan, at a joint press interaction.