Shrewd Swaps

Don Hanna, acting chief economist at Citibank, said China had less to fear from the inflationary potential of the Fed's quantitative easing than from the dire US fiscal outlook.

Faced with huge future pension and health care liabilities, America's debt profile was not sustainable, Hanna said. But other rapidly ageing developed countries were in the same boat.

Still, China is striving at the margins to diversify a national overseas investment portfolio that is massively concentrated on dollar claims on the United States.

-- Beijing has said it will buy up to $50 billion worth of SDR-denominated bonds to be issued by the IMF.

-- The PBOC has arranged currency swap deals with six countries since December totalling 650 billion yuan ($95 billion) so that trade and investment with China can be conducted in yuan, not dollars.

Hanna said these swaps were a shrewd move as they would allow China to accumulate claims on the rest of the world without increasing its exposure to the US currency.

"To the extent that it expands the invoicing of its trade in yuan, it is trading FX risk for credit risk," Hanna said.

Not So Fast

In a related policy innovation, China will soon allow selected firms in the southern province of Guangdong that trade with Hong Kong to settle their transactions in yuan, or renminbi.

Fang Xinghai, director-general of the Shanghai municipal government's Office of Financial Services, said the initiative was an important step towards making the yuan convertible.

"Why would we want in the midst of this financial crisis to make China's financial system more connected with the rest of the world?" Fang asked.

"As China's trade and investment has spread all over the world, it is practically impossible to keep our financial system closed as well as the currency permanently non-convertible. If anything, our trading partners will not allow us to do so."

Fang's enthusiasm is linked to his ambitions to see Shanghai become an international financial centre by 2020: a convertible yuan would presumably spawn keen demand from global investors for Chinese financial assets listed and traded in Shanghai.

Russia, for one, has expressed an interest in adding the yuan to its reserves once the currency is convertible. Moscow has also floated the idea of settling two-way trade in roubles and yuan.

William Rhodes, the senior vice-chairman of Citi, acknowledged the growing interest in denominating trade in yuan.

But Rhodes, a frequent visitor to Beijing, was circumspect. "All of this happens in stages. The Chinese are very cautious in all of this," he said.