A first step in this redirection of policy focus on domestic development is for China to free itself from dollar hegemony. This can be done by legally requiring payment of all Chinese exports to be denominated in yuan to stop the unproductive role of exporting for dollars that cannot be spent domestically without incurring heavy monetary penalty. Such a policy affects only Chinese exporters and can be implemented unilaterally by Chinese law as a sovereign nation, without any need for international coordination or foreign or supranational approval. (See Breaking free from dollar hegemony, Asia Times Online, July 30, 2008.)
Cross-border exchange of regional currencies is an important way to circumvent a shortage of dollars and other currencies, as well as reduce exposure to exchange rate volatility. Developing countries in eastern and central Asia as well as South America are beginning to recognize the Chinese yuan as an appropriate currency for bilateral trade settlements. In some case, the yuan is beginning to serve as a reserve currency for bilateral trade.
Central banks in China and South Korea signed a 180 billion yuan (US$26.4 billion) currency swap framework agreement on December 12, 2008. The People's Bank of China entered into a 200 billion yuan swap with the Hong Kong Monetary Authority on January 20, 2009; an 80 billion yuan agreement with Malaysia's central bank on February 8; a 20 billion yuan deal with the National Bank of Belarus on March 11, a 100 billion yuan swap with the central bank of Indonesia on March 24, and an 80 billion yuan swap with the central bank of Argentina. The swaps will allow the parties to avoid using dollars in trade between them and China. Other central banks have also indicated a willingness to enter currency swap agreements with China.
Currency swaps allows a central bank to inject a counter-party's currency into its own financial system, allowing domestic businesses to borrow the other country's currency and use it to pay for imports of that country's goods, thereby easing the pressure on trade caused by an insufficiency of dollar. Technically, currency swap agreements are simply two-way loans between central banks. Foreign central banks generally use borrowed yuan to settle trades with China or as a reserve currency. China, on the other hand, uses foreign currency holdings as collateral. Consequently, regional circulation of the yuan expands with bilateral currency swaps.
The system hinges on confidence in the yuan among all swap parties. As liquidity of the dollar, the generally accepted reserve currency for international settlement, dries up in the current financial crisis, serious problems in credit and exchange rate risks have emerged. As a result, regional demand for trade settlement in local currency has appeared. As the currency of the largest economy engaged in the production of manufactured goods, the yuan naturally fills in as the preferred currency to respond to this demand. The scale of currency swaps is determined by market demand, not by currency hegemony.
http://www.atimes.com/atimes/Global_Economy/KD15Dj04.html
World leaders miss the target
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