China reportedly wants to diversify large portions of its $1,000bn of foreign exchange reserves out of dollars, where most of them are now held. It is otherwise likely to sustain one of the largest capital losses in history, in terms of both its own currency, the renminbi, and external monies such as the euro, as the dollar inevitably falls by 20 per cent or more against virtually all currencies over the next few years to help correct the unsustainable current account deficits of the US.

The main issue for China is the choice of currencies into which it will shift. The only candidates for large movements are the euro and perhaps a couple of other European currencies, and the yen, in light of the limited size of financial markets elsewhere. Judicious Chinese selection among these alternatives could promote several basic international monetary objectives as well as preserve China’s national capital for future financial and developmental purposes.