This controversial proposal – and the support that it’s getting – also underscores China’s continued emergence as a growing global force in both the financial and political arenas. That’s a trend that successful global investors won’t be able to ignore.

The recent torrent of criticism to swirl around the dollar began with remarks by Chinese Premier Wen Jiabao.  Speaking last month at a press conference leading up to the recent Group 20 meeting in London, Premier Wen voiced his concern about the value of China’s large holdings of U.S. Treasuries.

“We have lent a huge amount of money to the United States,” he said. “Of course, we are concerned about the safety of our assets. To be honest, I am definitely a little bit worried. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

Of China’s $2 trillion in foreign currency holdings, about $1 trillion is invested in U.S. Treasuries and notes issued by other government affiliated agencies, such as Fannie Mae (FNM) and Freddie Mac (FRE).

“They are worried about forever-rising deficits, which may devalue Treasuries by pushing interest rates higher,” JP Morgan & Co. (JPM) analyst Frank Gong told The Associated Press. “Inside China, there has been a lot of debate about whether they should continue to buy Treasuries.”

Earlier this year, the Congressional Budget Office (CBO) projected that the U.S. budget deficit would nearly triple from last year’s $455 billion – and would reach a staggering $1.2 trillion. And that was even before U.S. President Barack Obama unveiled his $787 billion in stimulus, bank-rescue and anti-foreclosure plans. And that massive projected shortfall also doesn’t include other fix-up initiatives that are sure to surface in the months ahead.

But rather than sit idly by and watch the value of its reserves be eroded by the U.S. government’s economic policies, China is trying to lay the foundation for future change.

China and the SDR

On the eve of the G-20 summit, Zhou Xiaochuan, governor of the People’s Bank of China, released an essay entitled “Reform of the International Monetary System” on the BOC’s Web site.

Without explicitly mentioning the U.S. dollar, People’s Bank Gov. Zhou asked what kind of international reserve currency the world needs in order to secure global financial stability and facilitate economic growth.

According to Zhou, the dollar’s unique status as the world’s primary currency reserve has resulted in increasingly frequent financial crises ever since the collapse of the Bretton Woods system in 1971.

“The price [of relying solely on the dollar] is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies,” Zhou said. “Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.”

Zhou called for the “re-establishment of a new and widely accepted reserve currency with a stable valuation” to replace the U.S. dollar – a credit-based national currency. The central bank governor noted that the International Monetary Fund’s Special Drawing Right (SDR) should be given special consideration.

Created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system, the SDR was redefined in 1973 as a basket of currencies. Today, the SDR consists of the euro, Japanese yen, pound sterling, and U.S. dollar.

“The SDR has the features and potential to act as a super-sovereign reserve currency,” said Zhou. “Moreover, an increase in SDR allocation would help the Fund address its resources problem and the difficulties in the voice and representation reform. Therefore,efforts should be made to push forward a SDR allocation.”

Zhou proposed the following actions to move the SDR in a direction that could better accommodate demand for a more stable reserve currency:

• Set up a settlement system between the SDR and other currencies. Therefore, the SDR, which is now only used between governments and international institutions, could become a widely accepted means of payment in international trade and financial transactions.

• Actively promote the use of the SDR in international trade, commodities pricing, investment and corporate bookkeeping. This will help enhance the role of the SDR, and will effectively reduce the fluctuation of prices of assets denominated in national currencies and related risks.

• Create financial assets denominated in the SDR to increase its appeal. The introduction of SDR-denominated securities, which is being studied by the IMF, will be a good start.

• Further improve the valuation and allocation of the SDR. The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies, and the GDP may also be included as a weight. The allocation of the SDR can be shifted from a purely calculation-based system to one backed by real assets, such as a reserve pool, to further boost market confidence in its value.

China Rallies BRIC Allies

While China has been the most vocal proponent of a new – less-dollar-oriented – global currency system, other countries around the world have taken up the cause.

Russia, as Thursday’s videoconference illustrated, is working with China to push for an overhaul of the current currency system. In fact, the creation of a new reserve currency to be issued by international financial institutions was one of the measures Russia proposed to the G-20 on March 16.

Russia and China have also been joined by India and Brazil. Representatives from each of the four BRIC countries met in the weeks before the G-20 summit, and an unnamed source told Reuters that a shift away from the dollar was discussed.

“They (China) did not formally put forward their position for the G-20 summit but unofficially they had distributed their paper regarding the same ideas (the need for the new currency),” the source told Reuters, speaking on condition of anonymity.

Shortly after the G-20 meeting, Russia proposed that the IMF or G-20 study the creation of a new international reserve currency.

“The new global reserve currency has not been discussed at the summit. We only discussed it at several bilateral meetings,” Russian President Dmitry Medvedev’s chief economic aide, Arkady Dvorkovich, told a news briefing.

Weeks later, China agreed to a $10 billion (70 billion yuan) currency swap with Argentina.  That deal will allow China to receive yuan, instead of dollars, for its exports to the Latin American country.

Including the latest deal with Argentina, Beijing has signed about $95 billion (695 billion yuan) of currency deals with Malaysia, South Korea, Hong Kong, Belarus, and Indonesia over the past few months.

These deals undermine the status of the dollar as the world’s leading trade-and-reserve currency, but they also broaden the status of the yuan – something policymakers in Beijing see as being vital to China’s economic success, particularly in light of the current financial crisis.

“Beijing has its eye on raising the status of the yuan,” Ben Simpfendorfer, an economist at the Royal Bank of Scotland Group PLC (ADR: RBS), told The Associated Press. “They are the world’s second-largest exporter and the third-largest economy, so it is in their interest to handle trade in the yuan.”

While it continues to push for reform, China is also realistic about a timetable for achievement.

“”When a problem comes up, it’s always better to discuss it than not. But important reforms take more than one or two days,” Sun Zhongtao, a professor of international strategy at the Central Party School in Beijing, told the AFP. “Under the new system, the dominance of the dollar is set to be challenged. But it’s impossible to reach consensus on such issues overnight.”
But for many analysts, the support that China has been able to drum up in just a short matter of time is evidence of the nation’s growing economic and political clout.

“In the Asian financial crisis, China kept a relatively low profile and it didn’t assume any kind of leadership role at that stage,” Brian Bridges, a political scientist at Hong Kong’s Lingnan University, told the AFP. “Now the contrast is very significantly different in terms of China being much more open and involved in the financial system.”

For Bridges China’s determination to flex its financial muscle and expand political influence is what sets it apart from other would-be success stories, like the Japan of 1980s.

“In the case of China, you have a power which is almost simultaneously both becoming a rising economic power and also [becoming increasingly] involved in political and security issues around the world,” said Bridges. “It’s slightly different from the Japan model, because Japan was first an economic power and there was expectation it would become important in political and security issues. But it never actually fulfilled that role.”

Source:  China Flexes its Muscles and Finds Support in a Bid to Dump the Dollar as the World’s Main Reserve Currency

The closest fellow they’ve got is Wen Jiabao – China’s prime minister and a man intent on spending his way out of the country’s economic problems. He might just succeed, too. More on him in a minute.

While millions of Irish revelers (and wannabe Irish) were no doubt nursing ugly hangovers this morning, China has one of its own: A record 25.7% plunge in exports during February.

With the Chinese New Year holiday having occurred in late January this year, economists expected February’s numbers to look better than January’s 17.5% drop from a year earlier – or to at least stabilize. But instead, it highlighted a country with a split personality.

Let’s look at China’s Jeckyll and Hyde economy…

February Flop

On the one hand, it’s evident that China having a very hard time selling its goods to the rest of the world, which (like China) is in the midst of a sharp economic slowdown. For example, deep recessions have hit major export consumers like the U.S. and U.K., plus widespread weakness across Europe.

For a country whose massive export growth has formed the foundation of its economic explosion, it’s no surprise that with this pivotal sector having steadily declined since November, so too has China’s economic growth.

A government forecast puts China’s first quarter GDP growth at 6.5%, compared with the 6.8% fourth quarter figure. And as exports tumble, the World Bank now estimates 6.5% growth for 2009 overall, the weakest since 1990 and a sharp cut from its earlier 7.5% projection.

But on the other hand, there are signs that China’s stimulus program is working, with internal investment rising.

China Hopes For Some Bang For Its Yuan

While its export market is flagging, China’s government is trying to boost its prospects in a way that it can directly control: Spending.

And with a $585 billion stimulus package rolling through its economy, China is adhering to the notion that if you want the best results, you have to spend a bit to get them. China’s banks have lent more money over the past three months than in the past year, according to the New York Times. The number of loans in February alone quadrupled to just over one trillion yuan ($157 billion).

A large portion of the money is going towards repairing and rebuilding China’s aging infrastructure. The National Bureau of Statistics said fixed-asset investment spending shot up by 26.5% to 1.03 trillion yuan over the first two months of 2009, compared with the January-February period in 2008. That thrashed estimates by 5%.

In turn, the improvements could give China a crucial competitive advantage. While others bail out their economies and slide into debt, China is using its strong cash position (ironically borne largely from its export growth) to now help offset export declines and its reliance on that area by improving prosperity from within.

Already, railroad spending tripled over the first two months of the year – much-needed investment for an industry that has struggled to cope with industrial production and demand. That’s in addition to increased spending on the country’s roadways. Construction equipment sales are projected to climb by 20% over the second half of 2009. Education, research and development, and social programs are also enjoying increased spending.

In some ways, the global downturn has forced China to stop relying on its exports and real estate market for growth and instead adopt a wider, more strategic focus.

And there could be more on the way…

Back Up The Stimulus Truck

China’s Prime Minister Wen Jiabao is certainly bullish when it comes to spending money.

Four months after announcing the $585 billion stimulus package, Jiabao pledged to “significantly increase” spending in a speech two weeks ago. He reiterated that more recently in saying that the government has “reserved adequate ammunition” to “introduce new stimulus at any time.”

He may need to, in order to meet his government’s 8% GDP growth target and stem the tide of rising unemployment. With 20 million migrant Chinese workers now jobless and blue-collar job wages falling, it puts additional pressure on China’s fragile pension and healthcare systems – and heightens the prospect of social unrest.

But with all the new money washing through its economy, China is still a viable investment…

In The Year Of The Ox, Should You Be A China Bull?

“As long as the government’s stimulus measures to boost domestic consumption are properly implemented, investment growth will continue to accelerate, making up for the loss of exports.”

So says Ma Jiantang, head of China’s National Statistics Bureau. And given the surprising speed with which many investors have jumped off the China bandwagon, that bodes well for those who still retain some perspective.

Despite cutting its forecast for China, the World Bank says China will fare better than most other economies, driven by its stimulus efforts. In addition to huge infrastructure spending and bank lending, retail sales were up 15.2% over the first two months of the year, with auto sales rocketing 25% higher. And the Shanghai stock market is up 22% this year, too.

Plus, firms like Intel (Nasdaq: INTC) and manufacturers Hon Tai (Taiwan) and IMI Plc. (Britain) are boosting their operations and employment in China.

What’s more, in the wake of the government loosening regulations on Chinese companies wishing to make foreign acquisitions, the commerce ministry is sending a delegation to Europe, specifically on the hunt for buyout targets in a range of industries.

It’s not all rosy in China, of course. The country is suffering at the hands of the global economic downturn like many others. But China is using the wealth and prosperity it’s built up over the past several years to deal from a position of strength.

So while some headlines may play up the doom and gloom, it’s also clear that the China bull is still alive and kicking in some areas.

Source: China’s New Bull Run

“There will be less supply of pork, less supply of rice,” said Sun Mingchun, a Hong Kong-based economist at Lehman Brothers Holdings, speaking to Bloomberg. “It’s not causing supply to decline drastically but it is definitely less. The impact on inflation is more than its impact on growth.”

More from that story:

Premier Wen Jiabao said in a statement today that the quake makes the outlook uncertain and that that there could be upward pressure on prices. He also announced that the government is setting up a 70 billion yuan ($10 billion) fund to pay for reconstruction work.

Chinese wireless technology companies are still a safe bet though, says Wayne Mulligan in Penny Sleuth.

“The ‘hot’ market is China and one of the fastest growing sectors is wireless technology. And now we’ll add some market capitalization requirements — let’s say that we’ll be examining wireless companies that are trading under a $500 million market cap.

“Immediately, three companies show up on my radar: China TechFaith Wireless (CNTF: NASDAQ), Qiao Xing Mobile Communication (QXM: NYSE) and Orsus Xelent Technologies (ORS: AMEX).

“China TechFaith designs and manufactures mobile handsets for the Chinese market and abroad. They’ve had a rough go of it for the last two years, but the last 12 months have treated the company well.”

Read on here to find out more about profiting from these hot China tech plays.