A few weeks ago, five Chinese vessels, two of them fishing trawlers, surrounded a US naval ship, the Impeccable, off Hainan island in the South China Sea. When the US survey ship responded with fire hoses, the Chinese crewmen stripped down to their underwear and – according to some reports – bared their bottoms.

The slightly surreal stand-off, which drew a sharp protest from Washington, was carefully calibrated. Though it fell well short of a military exchange, it nevertheless sent a message that Beijing was not prepared to tolerate routine US spying missions in waters it considers its own.

In the more cerebral world of monetary policy, Zhou Xiaochuan, China’s central bank governor, has sent a carefully calibrated signal of his own. While he stopped short of baring his bottom, he published a paper, neatly timed to appear just before the Group of 20 developed and emerging nations summit, in which he proposed replacing the dollar with an international reserve currency. In a detailed and serious analysis, he suggested expanding the scope and function of special drawing rights, a unit of account used by the International Monetary Fund.

Mr Zhou’s proposal did not emerge from thin air. In recent weeks Beijing has been vocal about its concerns over the US dollar, a currency that it fears could be debased by ever more wanton printing to rescue a worn-out economy. Wen Jiabao, China’s premier, referring to the fact that 70 per cent of China’s almost $2,000bn (€1,500bn, £1,400bn) in foreign reserves is held in dollars, said: “To be honest, I am a little bit worried. I request the US to maintain its good credit, to honour its promises and to guarantee the safety of China’s assets.”

Beijing has simultaneously been taking cautious steps to make its currency more internationally relevant. This week, Mr Zhou signed a Rmb70bn ($10bn, €7.7bn, £7.1bn) currency swap deal with Argentina, designed to allow the Latin American nation to settle some trade bills in renminbi. It followed swaps with South Korea, Malaysia, Indonesia, Hong Kong and Belarus.

There is much substance to Mr Zhou’s proposals. Arthur Kroeber of Dragonomics, a research company in China, argues that Beijing is staking out a responsible position whereby it seeks a multilateral alternative monitored by a multilateral body. It does not want to challenge the dollar but is serving notice that, over time, the world should diversify from overdependence on one currency.

China, which is being asked to stump up more money for the IMF, would also like to ensure that it is not bankrolling a has-been institution. If it funds the IMF, it would like something in return.

Yet neither is the proposal entirely what it seems. Like the naval skirmish, there is an element of bravado. Beijing is signalling that US hegemony, while it cannot yet be seriously challenged, cannot last forever. The idea of questioning the dollar’s pre-eminence has received backing from other nations with agendas of their own. Russia has proposed something similar. Hugo Chávez, South America’s gringo-basher-in-chief, supports Beijing’s stance and suggests that a new supra-currency be backed by oil reserves, his own included.

That there is an element of theatre to Beijing’s proposal can be deduced from several factors. First, few people, not even Mr Zhou, can really expect the SDR to play the role of über- currency. To be credible, the issuing institution, the IMF, would have to run a central bank. It might also need, with due respect to the Swiss franc and the Japanese yen, to back its currency with an army and navy.

Second, it is clear that China’s currency ought to play a bigger international role. But the main obstacle to that is not in Washington. If China’s currency were fully convertible, other countries would doubtless already be holding a small, but respectable, proportion of their foreign reserves in renminbi, much as they already do with the euro and the yen. Mr Zhou’s remarks offer the faintest hint that Beijing may consider convertibility marginally sooner than many have been assuming. But fears of capital outflows and wild, export-damaging swings in the renminbi mean that is still likely to be years away.

Third, Beijing’s nightmares of a sudden fall in the dollar depleting its foreign reserves are overdone. It is true the government has been heavily criticised for ill-timed purchases of equity stakes in western banks. But China’s holdings of US Treasuries are not an investment. Unless Beijing is seriously considering selling down its US assets, a fall in the dollar would produce purely theoretical losses.

That leads to the final point. Mr Zhou’s paper distracts from the fundamental point that China would not have huge dollar holdings if it had not pursued specific policies – namely export-led growth predicated on a competitive renminbi.

Shortly after his paper on the end of the dollar, Mr Zhou published his thoughts on high savings rates, the flip side of US borrowing. China resents suggestions that its “excess savings” are linked to excess spending elsewhere. In his paper, Mr Zhou argues that, contrary to mechanistic arguments that savings rates can be influenced by policy, the Chinese propensity to save has cultural roots, specifically a Confucianism that “values thrift, self-discipline …and anti-extravagancy”.

Such deep-seated habits are, by definition, extremely hard to change. The message is clear. It is America that must budge.


More columns at www.ft.com/davidpilling

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