China Gain Leverage On U. S. With Wide Ranging Assault on Dollar.

While Hillary was in Moscow last week being treated more like a stray cat than America’s top diplomat and having her nose rubbed in it over Iran and Putin couldn’t be bothered even to say hello but was up to mischief in China

The most notable outcome of Russian Premier Putin’s just-completed trip to Beijing is not simply that both countries signed trade deals worth more than $4 billion.

Of even larger significance is that Beijing and Moscow have reached tentative agreement on using the Yuan Renminbi and Ruble — and not the U.S. dollar — for settling many of these transactions, including a deal in which Russia will supply 70 billion square meters of natural gas to China annually.

At the G-20 meeting in London in April, Zhou Xiaochuan, governor of the People’s Bank of China, raised eyebrows when he suggested that the greenback should gradually be replaced by Special Drawing Rights (SDR) of the International Monetary Fund (IMF) as the world currency in which most nations hold their reserves.

The issue failed to attract substantial support and was not discussed at the more recent G-20 conclave in Pittsburgh. While Chinese financial officials have apparently stopped talking about the SDR alternative, they have concluded agreements with about 10 countries — especially fast-developing nations such as Brazil — to settle bilateral trade with the Yuan and currencies other than the U.S. dollar.

Official Chinese media have been replete with articles predicting the further depreciation of the greenback in the coming year or so.

Perhaps even more significant is that partly due to Beijing’s initiative, Arab countries have held unpublicized talks with countries including China, France and Russia to gradually stop using the greenback for oil trading. Instead, the countries involved will use a basket of currencies that will include the Yuan, Euro, Yen, gold and a single currency planned for member nations of the Gulf Cooperation Council.

However, since about 65 percent of world oil reserves are still held in U.S. dollars, it is unlikely that the greenback’s dominance will be significantly challenged in the near future.

The bulk of China’s $2.1 trillion foreign-exchange reserves are also in greenback-denominated assets, including some $800 billion worth of U.S. treasury bills. In the short term, dissing the American currency will hurt Beijing as much as Washington.

It is also unlikely that the Yuan will be in a position to challenge the U.S. dollar or other major currencies any time soon. While the administration of President Hu Jintao has plans to render the Yuan fully convertible, this is not expected to come to pass within the next or so five years.

Beijing’s ability to vitiate the dominance — and stability — of the U.S. dollar, however, is a weapon that Hu’s diplomatic and foreign-trade officials can wield to good effect in negotiations with Washington.

This perhaps explains the fact that since taking office, the Obama administration has adopted a very cautious and confused approach to relations with Beijing. For example, Washington has virtually stopped commenting on China’s atrocious human rights record or on its harsh policies toward Xinjiang and Tibet. Obama snubbed the Dalai Lama lest meeting with the Tibetan leader upset Red China. And Washington has not criticized the Hu administration for failing to crack the whip on North Korea, China’s long-standing ally.

Diplomatic analysts knowledgeable about Beijing’s tactics have warn, however, that Obama’s conciliatory stance, if not outright weakness, might only prod the Chinese Communist Party leadership toward playing hardball through means including redoubled assaults on the dollar.

Based on an article by Willy Lam is a Hong Kong-based China scholar and journalist specializing in Communist Party politics and foreign policy.