ABSTRACT
In May 2005, the former US secretary of state, Henry Kissinger, was sent as an unofficial envoy to the PR China by the Bush administration. The message he reportedly conveyed was unusual: the American government urged Chinese authorities to revalue their currency by at least 10 per cent (Balls 2005). Looming in the background was the threat of protectionist legislation in the American Congress which had got increasingly restive about the enormous trade deficit the US was running with China for years. Embattled sectors of the American industry claimed that Beijing pegged its currency to the Dollar at an artificially low level and that this represented an unfair competitive advantage for Chinese exports. The trade deficit resulted in rapidly increasing foreign exchange reserves in China, most of them held in Dollar-denominated bonds. In March 2006, these amounted to more than $875 bn (The Economist 22 April 2006). And China was not the only country to accumulate a massive amount of Dollar assets. Its reserves were surpassed by those of Japan (up to $900 bn), and even Taiwan and South Korea both held more than $200 bn (Gimbel 2005). What worried observers about these enormous amounts held by Asian central banks was the possibility that these countries would start to diversify their reserves, triggering a contagious sell-off by private and official investors with the result of a rapid fall in the value of the Dollar (ECB 2006; Roubini and Setser 2004). This prospect has not only sparked intense debate among specialists and journalists; it has also induced the leading countries to expand the role of the International Monetary Fund (IMF) by giving it an official mandate to negotiate a solution to global imbalances (Giles and Guha 2006).
