Different conceptions of China’s future role in the global financial system

Here the interest of debtors and creditors are not aligned. Debtors want their debts to be denominated in their own currency, and to carry a low interest rate. Creditors would rather lend in their own currency. The implicit pre-crisis bargain was that the US — the debtor — borrowed more than it should have, but the creditor –China — also accepted more currency risk than it should
have. I don’t see how China can start lending in its own currency without calling the overall bargain into question.

The best solution, it seems to me, is moving toward a world where trade and capital flows are more balanced. Then there would be no sustained need for the governments of the major Asian economies to buildup huge claims on the rest of the world.

One thing is clear: Some big questions about the shape of the post-crisis global financial order have yet to be resolved.

http://blogs.cfr.org/setser/2009/05/15/different-conceptions-of-chinas-role-in-the-global-financial-system/