Sinomania!

Despite all the heated rhetoric this year from Beijing, China's holdings of US Treasuries rose to $800.5 billion (US dollars) in July. China remains the single largest creditor for the USA....

A swirl of pitches from "gold bugs" and currency commenters say China is buying gold and so should you. The excited headlines are based on various remarks by former and current Chinese government officials on Beijing's concern over the health of the almighty (US) dollar. Many of the remarks most often cited were said over the past year and some date back several years.

It is true Beijing is buying gold from domestic production, slowly, and some say secretly - initially off the official statements of the People's Bank of China. But the amount of gold held is a tiny fraction of the $2.13 trillion (as of 6/30/2009) foreign exchange reserves Beijing holds.

Will China switch to a gold standard? That question has tantalized speculators on and off throughout history. Little more than a century ago, Beijing's decision to not follow the USA and Japan with a gold standard may have contributed to the collapse of the Chinese currency (based on a silver standard) by the 1940s.

One thing stands out - talk of internationalizing Renminbi is everywhere. Henry Kissinger predicted on Bloomberg TV just a few weeks ago that an alternative international currency will probably emerge based around the Yuan. Investment guru "Dr. Doom" Marc Faber once predicted that the world's finances would become based on the dollar, euro, Yen, Yuan, and gold.....

[CORRECTION: Reuters reports that the People's Bank of China will use Yuan not dollars to buy the IMF SDRs.]

In a move celebrated by the IMF, the Chinese central bank will convert $50 billion into SDRs or Special Drawing Rights bonds. SDRs are based on a basket of convertible currencies and were created by the IMF in the 1970s to convert away from gold. Whether SDRs convert as easily into gold is another matter for speculation. Whether SDR or gold, this is further evidence of Beijing's unease over its world's largest holdings of US dollars.....

UPDATE: Brad Setser of the CFR analyzes Beijing's actions in US Treasuries and sees not a reduction in overall holdings but a slowing of purchases is evident.

Meanwhile, the Shanghai Cooperation Organization summit in Yekaterinburg, Russia, could be the most important meeting this year as China, Russia, and central and south Asia nations discuss moving their foreign exchange reserves into the IMF.....

The much anticipated G20 Summit in Washington, DC, resulted in the following reassurance from the G7 nations plus BRIC and other "emerging" economies:

In the words of one participant the gathering was "plain vanilla" and intended - like the opulent showy setting in Washington's monumental old Pension Building - to give the illusion that the world's political elite are united in responding to the Panic of '08.

Meanwhile most of the world's reserve currency, the dollar, is held outside the "Western" world while the latter still controls the old global institutions of the past - the IMF and the UN.

The coordinated rate cuts by central banks around the globe today included China. The faded G7 powers and their corporate and state-owned (BBC, for example) press still view the so-called "subprime," "credit," "liquidity," financial crisis as an Atlantic Alliance issue. Nothing could be further from the truth. China is at the core of the financial system as much as the USA since they both depend on the "Bretton Woods II" regime of financing trade deficit with borrowed dollars. For years the USA has agreed with China that 'you buy our goods, we buy your debt.' That system is now unravelling.

A week ago the President of France Nicholas Sarkozy said "Laissez-faire is finished." He joined the call first made last year by outgoing German Chancellor Gerhard Schroeder for a G7 summit to fix the world's financial mess.

But what we really need is a Bretton Woods III conference where the USA, the EU, and China sit down and hammer out what the world's financial future will be. Certainly rich holders of dollars such as Japan, Russia, and financial centers of the Middle East should be there too as important participants.

If the future will be multipolar balanced by the dollar, the Euro, the Yen, Renminbi (Yuan), and Gold, as famous gloomsayer Mark Faber forecasts, then we need to get together now to craft a new system.

An interesting discussion underway at Brad Stetsor's blog at the most excellent RGE Monitor website on the dollar's shrinking value and its ultimate impact on China centers on a hot editorial in the Shanghai Daily that says:

"The negative results of the US dollar's decline are evident: the rising prices
of all primary products, the intensified pressure on inflation globally, the confusion in the settlement of international transactions, etc. Worst of all, this is the US' disguised way of avoiding paying off its debts to foreign
countries."

According to Morgan Stanley's global economic group:

"In the long run, the most likely contender to the USD as the dominant
international reserve currency, in our opinion, is likely to be an Asian
currency centred on the Chinese RMB."

Of course this is big picture and looong term (decades if not more). Something to think about just the same.