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Ahead of the G-20 Summit in London on April 1 and 2, China has played its card. It is calling for a new global currency to replace the dominant US dollar. China has let its central bank governor do the loud talking first. Governor Zhou Xiaochuan wrote in an economic essay, published on Monday, that the world financial and economic crisis shows the "inherent vulnerabilities and systemic risks in the existing international monetary system."

Thus, he called for nations to come together to create a currency made up of a basket of global currencies and controlled by the International Monetary Fund. This would help restore global financial and economic stability.

Why is China making this move now? The Chinese have been feeling uneasy about their vast holdings of US dollar assets, currently standing at about US$1 trillion (Bt35.5 trillion) worth. Recently, Premier Wen Jiabao urged the US to honour Chinese investment in US assets by guaranteeing or protecting its safety.

US Secretary of State Hilary Clinton earlier called for China to continue to support the US by refraining from dumping dollars and continuing to buy the US treasuries. The Chinese listened attentively but would not give any promises. If the US is to face a dollar crisis, then everybody else needs to seek his or her own protection.

Since opening up its economy over the past three decades, China has accumulated new wealth. It produces cheap goods for the US domestic market to consume. In return, it gets US debt. Japan and some emerging-market economies also participate in this export-led game to the US in order to build up reserves. This arrangement has created a global imbalance. Economists have recognised this imbalance as a problem, but none would dare to break away from the mould. In the meantime, China's wealth has been reinvested in the US in all kinds of assets. These assets are now at risk of a meltdown if the US fails to fix its financial crisis.

The point is whether China will continue to reinvest in US dollar assets or whether it will diversify away from the dollar by cutting its losses. There is no middle ground at this point.

By parting with the dollar as the world's reserve currency, China is effectively calling for a new international financial system, with a new currency similar to the IMF's Special Drawing Rights as the anchor. China also wants to steal the show from the UK, which is hosting the G-20 Summit. Gordon Brown, the British prime minister, would like to use the G-20 Summit as a showpiece to launch a new Bretton Woods system that would replace the existing order, which is crumbling.

Obviously, the US is not happy with what is going on. It has enjoyed the privilege of spearheading the US dollar as the world's reserve currency. President Barack Obama described China's proposal for a new reserve currency as unnecessary during a prime time news conference on Tuesday.

"I don't believe that there's a need for a global currency," Obama said. "The reason the dollar is strong right now is because investors consider the United States the strongest economy in the world with the most stable political system in the world."

Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke took similar positions at a congressional hearing. They were asked by Republican congressman Michele Bachmann of Minnesota if they would "categorically renounce the United States moving away from the dollar and going to a global currency". Both said they would.

The US will resort to every means to prevent a move away from the dollar as the reserve currency. But can it stop the trend?

Already the world is wondering, especially after the admission by Geithner earlier this week that US authorities have no power to take over weak banks that pose a systemic threat to the US economic system as a whole. He also admitted that the US financial system is fragile and that it needs an urgent overhaul.

If the US can't safeguard the soundness of its financial system, how can it assure the rest of the world that it can guard the stability of the dollar?

A currency collapse normally comes after a failure of the financial system. At this point, all the big US banks are in trouble, with a growing risk of widespread insolvency. They are being put on a life support system by the Federal Reserve Board. Most of the big names will be wiped out. The Fed is also going to print massive sums of money, to the tune of more than $1.2 trillion ,to prevent a collapse in the payment system.

Geithner's plan may buy out toxic assets from the banks and keep them afloat for a while, but the fundamental question is how big the losses of the financial system are - losses from the off balance sheets that have yet to be quantified.

Insofar as this big black hole has not been addressed or dealt with decisively, there is no way that the US financial system can be fixed. If the fixing of the US financial system is delayed further, coupled with the continuing severe recession, the dollar will soon face a full-blown crisis. By that time, it will be too late. And it might already have been too late anyway.