Xinjiang Is more Important than a New International Moneary System for China's Hu Jintao

The drama at the G-8 meeting in Italy came when China's Hu Jintao deserted the conference before it began.

Richard McGregor and Kathrin Hille explain Mr. "Hu, the president and communist party head, convened an emergency meeting of the leadership, the nine-member inner-circle of the Politburo, hours after arriving home on Wednesday from his truncated G8 trip to Italy.

The management of the crisis is a high-profile test for Mr Hu, who must satisfy the demands of hardliners within the party for a tough response, with an eye on the sensitivities of Muslim countries offshore.

China has blamed Sunday’s violence in Urumqi, which left 156 people dead and more than a thousand injured, on Xinjiang’s indigenous Muslim population, the Uighurs."

Thus it was Mr. Hu's surrogate that delivered China's call for a less dollar dependent international monetary system.

As George Parker, Guy Dinmore, Krishna Guha, and Justine Lau tell it "China attacks dollar’s dominance:" (FT: July 9 2009)

"China has launched its highest-profile criticism of the dominant role of the US dollar as a global reserve currency at a meeting of the world’s biggest economies.

"Dai Bingguo, Chinese state councillor, raised the issue on Thursday when he joined the leaders of four other emerging economies for talks with the leaders of the Group of Eight industrialised nations – including US President Barack Obama."

China has already taken concrete moves toward a reduced reliance on the greenback:

"China moves to cut reliance on dollar"

By Richard McGregor in the Financial Times, July 3 2009, Page 19


China has taken another step towards internationalising its currency and reducing reliance on the US dollar with the announcement of new rules to allow select companies to invoice and settle trade transactions in renminbi.

The regulations released by the People's Bank of China, the country's central bank, will allow approved companies to settle transactions through financial institutions in Shanghai and other cities in southern China.

Offshore, the trial scheme will allow transactions to be settled in renminbi in Hong Kong and Macao, the two self-governing territories on China's southern borders, and later in a limited fashion in south-east Asia as well.

Importers and exporters will be able to place orders with authorised Chinese companies, and settle payment for them, in renminbi.

Although it has no short-term implications for the full convertibility of the renminbi, the announcement adds to the volley of political signals Beijing has sent recently over its dissatisfaction with the US dollar.

"To many minds in China the US dollar's time is almost up, the eurozone suffers from political paralysis and a too-conservative central bank, while two decades of economic stagnation and a shrinking population do the yen no favours," said Stephen Green, of Standard Chartered, in Shanghai.

"For them, the renminbi is an obvious, and imminent, replacement."

Far from being a replacement for the dollar as a freely-traded reserve currency, the move has been justified by the PBoC initially as assisting exporters buffeted by the greenback's fluctuating value.

"Companies in China and neighbouring countries are facing relatively large risks of exchange-rate fluctuations because of big swings in the US dollar, the euro and other major currencies used for settlements," the PBoC statement said.

The rules have also been expressly drafted to ensure that the new regime is not used to circumvent China's capital controls, by requiring supporting documentation for transactions.

"Domestic settlement banks should take effective measures to know the nature and purpose of their clients' trading," the central bank said.

The announcement of an offshore role for the renminbi chimes with China's call earlier this year for a new reserve currency.

He Yafei, a vice-foreign minister, said in Beijing yesterday that China supported reserve currency diversification in the future and that it would be "normal" for the issue to be raised at the G8 talks.

The volume of trade conducted under the new rules is expected to be small initially, but over time it should increase demand for the renminbi.


Copyright The Financial Times Limited 2009