China Must Escape ‘Dollar Trap:’ Former Official

China should stop buying U.S. dollars and allow the renminbi to float as quickly as possible, according to a former member of the monetary policy committee of China’s central bank. That will allow the country to escape the “dollar trap.”

Yu Yongding said in a piece published in the Friday Financial Times that the Chinese government has allowed risk to escalate by holding such large dollar reserves while maintaining renminbi-denominated liabilities. “Chinese officials are understandably angry about the irresponsible brinkmanship demonstrated by their American counterparts in recent weeks,” Yu began. He then said that it was time for China to “end its dependency on the U.S. dollar.”

The danger, according to Yu, is that America will allow its debt to grow until it has “no option but to inflate the burden away.” The longer the arrangement continues, “the more violent and destructive the final adjustment will be.” The solution? Float the renminbi, despite the fact that to do so is “not costless.”