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China's Foreign Exchange Reserves: Unintentional Means to a Strategic End

Growing global reach is an important tenet of China's quest for comprehensive national power, but it is unlikely that even the Chinese expected the accumulation of $2.3 trillion of foreign exchange reserves -- with US dollar assets accounting for 65-70 percent of these holdings -- to propel them into the heightened global status they currently enjoy. Nonetheless, China certainly can claim a number of wins in its column as a result of concern within the United States and among other developed economies over whether China might diversify its holdings too quickly or dump too many.

Win Number One: The West is not just considering but actually moving toward granting China more say in international financial institutions. At the G-20 Summit in Pittsburgh in September, Chinese President Hu Jintao appealed for an increase in the voice and representation of developing countries in international financial organizations, echoing a call he made at the G-20 Summit in November 2008 in Washington. Indeed, the Leaders' Statement from the Pittsburgh summit pledged to move forward on the reform of the International Monetary Fund (IMF) and the World Bank by shifting 5 percent of IMF voting rights and 3 percent of World Bank voting rights from developed countries to developing and transition countries with the goal of benefiting under-represented countries.

Win Number Two: China has successfully persuaded global economies and institutions to consider the creation of a non-sovereign currency to replace the US dollar as the international reserve currency. Zhou Xiaochuan, chief of the People's Bank of China (China's central bank), in March called the acceptance of credit-based national currencies as major international currencies "a rare special case in history." He then called for replacing the dollar as the dominant world currency with an international reserve currency that is disconnected from individual nations, "thus removing the inherent deficiencies caused by using credit-based national currencies." His proposal would create a super-sovereign currency perhaps in the form of the IMF's special drawing rights (SDRs). The feasibility of the plan is certainly open for debate, but Zhou, with support from Russia, effectively put the idea on the table, eliciting a categorical rejection from Treasury Secretary Geithner, Federal Reserve Chairman Bernanke, and President Obama who said that he did not believe there is a need for a global currency.

Win Number Three: The G-20 is now the main platform for international economic cooperation, replacing the G-8 and allowing China to continue to avoid the responsibilities that come with membership in the developed world. Indeed, the Leaders' Statement from the G-20 Summit in Pittsburgh and a White House press release from 24 September put the G-20 "at the center of efforts to work together to build a durable [economic] recovery." Moreover, President Obama in a speech at the Summit said that "the G-20 will take the lead in building a new approach to [economic] cooperation."

Win Number Four: Washington's seeming desire to avoid any sort of confrontation with China on issues that have consistently caused Beijing to bristle can be regarded as another win for the Chinese. Indeed, Washington appears to be wary of seriously discussing sticky issues like human rights and currency manipulation with Chinese officials out of concern that China could take a step that would damage the fragile global and US economies. Early on in the new administration, Secretary Clinton encouraged China to continue to purchase US Government debt but downplayed human rights issues by saying that pressure on China to improve its human rights record cannot "interfere with the global economic crisis, the global climate change crisis, and the security crisis." President Obama recently postponed a meeting with the Dalai Lama until after his November trip to China, a move perceived by some as one of conflict avoidance. Moreover, the US Administration--for the second time this year--in October stopped short of calling China a currency manipulator, a departure from President Obama's campaign rhetoric.

These wins, which appear to be simply bequeathed to China without requiring much in return, feed into China's longtime foreign policy goal of returning to its middle kingdom status where nations paid tribute out of respect for China's economic, military, and diplomatic prowess. In a modern sense, this tribute comes in the form of countries seriously considering how their decisions might affect their relationship with China and adjusting accordingly so as to avoid any sort of upset with the emerging power. This approach sets a dangerous precedent in one of our most important relationships, and it forgets that good relations with the United States are important to China, too. Damaged ties to Washington are not in China's interest, and Beijing has proved in the past that it expects to have to give a little to ensure the relationship stays on track. Our current approach sends the message that China can continue to rack up wins without having to do anything; we'll do the heavy-lifting, kowtowing as we go.

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