Dollar's not going to yield to yuan

China's idea of dumping the dollar as the world's reserve currency has about as much appeal in today's globalised economy as Esperanto. It might be a good idea, but nobody's ready to buy it.

China's proposal isn't about wobbly exchange rates. It's about making a statement before this week's Group of 20 summit. China, together with Russia and others, want to let Washington know that it is going to have to share the head table in what used to be an exclusive club.

China's ascendancy was a fact before the financial crisis. Now its political clout is catching up with its economic might. But when it comes to currency, the dollar is still king, and will probably remain so for some time.

Think about it. Who seriously expects to see commodities - from gold to cotton to oil - priced in anything but greenbacks anytime soon? There have been times when Russia, Iran and Venezuela considered pricing crude in euros, but that idea evaporated for one simple reason: depreciating the dollar ends up harming those countries that hold them in reserve.

The first victim would be China, now the largest holder of US treasuries - about $740 billion-worth, more than a third of its entire foreign reserves.

The truth is you can't dictate which reserve currency countries will use, any more than you can make people speak Esperanto, a universal language invented 112 years ago that still hasn't taken off.

The euro is a common currency that did take off, although its track record is heavily debated. Frugal Germans fret about having to pay for spendthrift Greeks, while countries such as Italy long for the days when they could get out of trouble by devaluing their currencies.

The euro, now shared by 16 countries, is here to stay, but so far it hasn't been copied anywhere. Kazakhstan is pushing for the 'acmetal', while China wants its yuan to be accepted throughout Southeast Asia. Neither project is ready to leap into life.

Chinese central bank Governor Zhou Xiaochuan's plan, posted on the bank's website last week, was even more ambitious. He wants to move to a global reserve currency with a stable valuation benchmark that belongs to no individual nation.

If the eurozone has trouble managing 16 European nations, imagine the nightmare of managing a currency on a worldwide scale.

So far, no one has come with a good idea for an alternative to the dollar. China and Russia propose expanding the use of the International Monetary Fund's (IMF) Special Drawing Rights (SDRs), a cumbersome vehicle whose value is set by a basket of currencies. Russia has added the idea of putting gold in the basket as a stabilising element.

The IMF? Is that really the institution we want to manage complex international monetary politics? Critics have already questioned how the IMF would go about setting the value of the SDRs, and how it would resist political pressure to change the valuation.

For its part, the US will obviously defend the dollar's dominance as long as it can. Its status as the No 1 currency means the US doesn't have to repay debts in foreign tender, keeping borrowing costs down. A weaker dollar would make it harder to sell the Treasuries the government needs to jump-start the economy.

"A strong dollar is in America's interest," said US Treasury Secretary Timothy Geithner last week. Both France and Japan have said they will spurn talk of currency reform at the summit meeting in London on tomorrow.

Still, China has succeeded in putting everyone on notice, which was probably its goal. Like Russia, it has political reasons to challenge the US. China wants to divert attention from its own undervalued currency - a sore point in US-Chinese relations - while Russia seethes with resentment over US influence, which it refers to as "the obsolescent unipolar world order".

Given the size of its US holdings, China's proposal got everybody's attention. The message is plain: you can't print the world's dominant currency, and not keep the world in mind when you start running the presses on overtime. Holding onto the world's reserves carries special responsibility.

Back in 1971, when the US went off the gold standard, US Treasury Secretary John Connally warned European finance ministers: "The dollar is our currency, but your problem."

That will remain true for some time, no matter what China says.