China threatens U.S. dollar

WASHINGTON, March 24 (UPI) -- First, the good news: The Dow Jones industrial average rallied 500 points Monday, reflecting Wall Street's confidence in Treasury Secretary Timothy Geithner's new plan to save America's banks.

Then the bad news: People's Bank of China Gov. Zhou Xiaochuan wrote on the bank's Web site that it was time to step back from the U.S. dollar as the world's currency of choice. He said it was time to consider a global system controlled by the International Monetary Fund.

The bad news trumps the good news.

Zhou's comments came only two weeks after Chinese Premier Wen Jiabao said his government was concerned at its heavy exposure to U.S. debt. The state bank of China holds more U.S. Treasury bonds than any other country in the world -- $681.9 billion in November.

Zhou's warning is of huge significance: It threatens prospective hyperinflation and ruin for the U.S. economy and the loss of the dollar's role since World War II as the global currency.

Zhou proposed that the International Monetary Fund should include more currencies in its Special Drawing Rights, which have not been revised since 1969. Currently the IMF uses the U.S. dollar, the Japanese yen, the British pound sterling and the euro to determine the value of the SDRs.

Despite the glee among American investors over Wall Street's latest recovery spike Monday, this proposed move would shake the U.S. economy. If China pulled out of U.S. Treasury bonds in a big way, the next largest holder, Japan, would almost certainly do so as well. Britain, the No. 3 holder, with more than twice the value in U.S. bonds than Saudi Arabia and all the Gulf states combined, would probably follow too.

The looming crisis has been directly caused by U.S. President Barack Obama's inability so far to rein in the wild spending of and printing of dollars that started under his predecessor, Republican President George W. Bush. Obama's much criticized stimulus package passed by both houses of Congress last month contained only around $81 billion of actual stimulus among its $787 billion in measures. Geithner's new proposal to restore liquidity to America's banks would pump more than $1 trillion in extra cash into the U.S. economy.

Russia has posited an idea similar to Zhou's proposal. Beijing and Moscow look likely to float such measures at the scheduled Group of 20 nations world economic summit in London.

U.S. leaders, legislators and pundits have paid relatively little attention to the slowly but surely mounting voices of concern and warning emanating from Beijing. Instead, there was optimism about Geithner's anticipated appearance Tuesday before the House Financial Services Committee to talk about banking reform. The 500-point surge in the Dow could make his appearance easier before people who have been calling for Obama to fire him.

But China's global economic clout overshadows whatever Geithner may tell Congress. It has just been reflected in the death of a peace conference in South Africa. The South African government refused to grant a visa to the Dalai Lama, the exiled leader of Tibet's Buddhists, to attend the gathering. When word of the action broke, other prominent attendees decided not to go.

South African officials said the Dalai Lama's appearance would take away from the attention the country wants ahead of its hosting of the World Cup next year. But analysts have noted that South Africa didn't want to offend China, which has become its important arms supplier and a major importer of its natural resources. China's economic and diplomatic clout across much of Africa already far exceeds that of the United States and the major European nations. There should therefore be no surprise when South Africa, one of the two most powerful and important nations on the continent along with Nigeria, put Beijing's interests at the forefront.

When Wen expressed his concern about the value of China's U.S. Treasury bond holdings, we described his warning in these columns as a fire bell in the night. Zhou's comments make it a two-bell alert. What will happen when the third bell rings?