While China s government should make greater efforts to rebalance the economy by conventional measures, it also should focus more attention on adjusting the currency structure of the country s gross assets and gross liabilities. In particular, China should try to replace its dollar denominated assets with renminbi denominated assets, and its renminbi denominated liabilities with dollar denominated liabilities.

In neither scenario does it make sense to hold huge amounts of dollar denominated assets today. Therefore, foreign speculators should, any day now, dump their dollar denominated assets onto the market, and so bring about the dollar decline that they so fear.

The external deficit of the United States is financed mainly by Central Banks that invest their foreign exchange reserves in dollar assets, for which euro denominated assets represent a serious alternative.

Second, China s foreign assets are denominated almost exclusively in US dollars, while its foreign liabilities are denominated mostly in renminbi. As a result, whenever the US dollar declines, China s net international investment position (the difference between its external financial assets and liabilities) deteriorates and so does its investment income balance.

Thus, while a significant proportion of expenditure is denominated in euros, some dollar expenditures remain.

Development related investments accounted for 12 per cent of the Fund apos s assets at book value, with about 43.8 per cent of these holdings denominated in currencies other than the United States dollar.

For the US, the fundamental cause of imbalances is not a strong dollar, but America s over consumption and over borrowing. A strengthening dollar would worsen the US trade balance, but a weakening dollar could cause panic in capital markets, which might push up risk premia on dollar denominated assets, including US government securities, in turn leading to an economic slowdown and a further weakening of the dollar.

The actual budget increase cannot be determined simply by noting a change in the dollar denominated amount.

But foreign currency speculators and international investors are not looking forward to either of these scenarios. They continue to hold very large positions in dollar denominated assets, which they would not do if they thought the US faced a choice between a cheap dollar and a deep depression.

In November 2001, the authorities again restructured the public debt, this time exchanging dollar denominated bonds for domestic guaranteed loans.

With rebalancing will come a decline in China s surplus saving, much slower accumulation of foreign exchange reserves, and a concomitant reduction in its seemingly voracious demand for dollar denominated assets. Curtailing purchases of US Treasuries is a perfectly logical outgrowth of this process.

The public sector was at the time running a broadly balanced budget, although government expenditure was partly funded by short term dollar denominated bonds (tesobonos).

Moreover, there may be a financial panic large financial institutions with short term liabilities and long term assets will have a difficult time weathering a large rise in long term dollar denominated interest rates. This mismatch can cause financial stress and bankruptcy just as easily as banks local currency assets and dollar liabilities caused stress and bankruptcy in the Mexican and East Asian crises of the 1990 s and in the Argentinean crisis of this decade.

Expanding local currency bond markets could expedite a shift from dollar denominated cross border loans to local currency loans, bringing benefits to both investors and borrowers.

This reflects the fact that the market in dollar denominated assets is exceptionally deep and liquid, which limits transaction costs. In other words, European practice reflects the dollar s exorbitant privilege as the only true global currency, freely accepted by currency traders and investors in China and around the world.

On one level, this is very frustrating we economists believe that people are smart enough to understand their situation and capable enough to pursue their own interests. Yet the typical investor in dollar denominated assets whether a rich private individual, a pension fund, or a central bank has not taken the steps to protect themselves against the very likely dollar decline in our future.

One can also question how much appetite European investors will display for renminbi denominated financial assets. In the past, demand for such assets has been fed by the expectation that the renminbi will continue to appreciate.

If they perceive that the dollar and dollar bonds have become riskier, they will want to change the distribution of assets in their portfolios. So, even if the dollar is still regarded as the safest of assets, the demand for dollars will decline if its relative safety is seen to have declined.

In a liberalized capital market, the undiminished risk that the yuan might appreciate means that investors must be compensated by a higher interest rate on dollar assets. But interest rates on dollar assets are given in world markets independently of what China does.

For example, WIPO's budget is denominated in Swiss francs and UNIDO's regular budget is denominated in euros.

This fear of a stronger dollar is the real reason for concern, bordering on panic, in many emerging economies and at the IMF. A significant strengthening of the dollar would indeed cause serious problems for emerging economies where businesses and governments have taken on large dollar denominated debts and currency devaluation threatens to spin out of control.

(v) Gain loss on exchange arises from transactions conducted in currencies other than dollars (i.e. for the dollar based extrabudgetary technical cooperation activities in annex I, dollar statements) and the revaluation of assets and liabilities held in non dollar currencies.

America depends on China s trade surplus and savings to finance its outsize budget deficits, while China relies on its huge exports to the US to sustain its economic growth and finance its military modernization. By plowing more than two thirds of its mammoth foreign currency reserves into US dollar denominated assets, China has gained significant political leverage.

Expenditures for staff costs and maintenance of the premises mainly denominated in euros have been translated into United States dollars in April 2002 at an average euro to dollar exchange rate of 0,8636.

But this is no easy task, particularly in the short term. If the PBC started to buy non dollar assets in large quantities, it would invariably need to convert some current dollar assets into another currency, which would inevitably drive up that currency s value, thus increasing the PBC s costs.

If foreign holders of dollar bonds become concerned that the unsustainability of America s situation will lead to higher interest rates and a weaker dollar, they will want to sell dollar bonds. If that feeling is widespread, the value of the dollar and the price of dollar bonds can both decline without any net change in the holding of these assets.

Domestically oriented macroeconomists look at the situation roughly like this at some point in the future, foreign central banks will become less willing to continue buying massive amounts of dollar denominated securities in order to prop up the greenback. When they cease their large scale dollar purchase programs, the value of the dollar will fall and it will fall hard.

As a result, when the dollar depreciates against the renminbi, the value of China s foreign liabilities increases in dollar terms, while that of its foreign assets remains unchanged. As a result, China s net international investment position (NIIP), which is the difference between China s gross assets and its gross liabilities, automatically worsens.

Certainly a lot of the discrepancy is attributable to valuation effects since 1982, the dollar value of overseas assets has increased repeatedly, owing to increases in the dollar value of foreign currency and increases in the assets foreign currency value. But part of the discrepancy also reflects the discovery of missing assets, some of which may have originated in the reinvestment of overseas income.

About 800 billion of China s foreign exchange reserves are invested in euro denominated assets. A disorderly default, and the resulting downward pressure on the euro, would unavoidably cause Chinese investments to lose value.

Of course, an earlier attempt was made to create a commercial market in SDR denominated claims. Back in the 1970 s, there was some limited issuance of SDR denominated liabilities by commercial banks and SDR denominated bonds by corporations.

Select the currency in which this account is denominated.

But perhaps the strongest message is being sent via targeted sanctions on Russia s oil, finance, defense, and technology industries, as well as on Russian officials. With this approach, the US and its allies are sending a clear message to anyone who may disagree with US policy avoid using the dollar and dollar denominated bank accounts.

The policy of making an allowance of 10 per cent of non United States dollar denominated outstanding accounts receivable as at 31 December as a provision for delays in the collection thereof, is discontinued effective 31 December 2003.

Acquisition security rights include those that are denominated as security rights, as well as those that are denominated as retention of title, arrangements and financial leases.

LONDON Ten years on, the euro is a resounding success. A financial market heavyweight, it now outperforms the dollar, the yen, and, until recently, the mighty Chinese yuan, while euro denominated bond trading rivals the US market in size.

Expenditures and the resulting changes shown in the fund balances of these accounts are due solely to the revaluation at current rates of exchange of the outstanding claims that are denominated in currencies other than the United States dollar.

In 1988 the Governing Body recommended and the International Labour Conference subsequently approved the adoption of a system of assessments denominated in Swiss francs combined with the forward purchase of the United States dollar expenditure requirements of the budget.

b Total public debt denominated in pesos and foreign currency.

During the 1997 1998 Asian financial crisis, East Asia s economies paid heavily for excessive accumulation of dollar denominated debts. Because governments failed to defend their currencies, they lost hundreds of billions of dollars in foreign exchange reserves to international speculators.

Periodically, assets and liabilities in currencies other than the United States dollar are revalued for accounting purposes at the prevailing United Nations operational rates of exchange.

Similarly, the quantitative easing (QE) that has defined many major central banks monetary policy in recent years does not involve buying or selling foreign assets. Under QE, the Federal Reserve buys and announces that it will buy assets the only difference is that these assets are longer maturity US government debt instruments and mortgage backed securities of various kinds, all denominated in US dollars.

Whether for self insurance or to maintain a competitive exchange rate, East Asia has since then accumulated a huge volume of dollar denominated assets. This time around, thanks to the deterioration of the US fiscal position and the Federal Reserve s expansionary monetary policy, the long term risk for emerging markets external balance sheets is shifting, as Eswar Prasad of the Brookings Institution has pointed out, to the asset side.

The Chinese Investment Corporation s biggest investment last year was a 30 ( 3.2 billion) stake in the gas and oil exploration and production sector of the French energy giant GDF Suez. CIC chose to take a significant share in one branch, rather than a small share in the whole group, because doing so offered both a strategic advantage (access to energy resources) and a monetary benefit (investment in dollar denominated assets).

And, despite a more competitive exchange rate, the US continues to run a large current account deficit. If progress is not made in reducing the projected fiscal imbalances and limiting the growth of bank reserves, reduced demand for dollar assets could cause the dollar to fall more rapidly and the interest rate on dollar securities to rise.