Just as U.S. policymakers are too sanguine about China’s military power, Harvard Professor Niall Ferguson says Washington D.C. is too complacent about China’s ability to wean itself off the dollar.

With about 1.7 trillion of dollar-denominated assets (mainly Treasuries) in its foreign currency reserves, conventional wisdom goes something like this: If China were to diversify away from the dollar or merely allow the renminbi to float, much less dump its greenbacks wholesale, they would be shooting themselves in the proverbial foot. That’s both as investors and because further dollar weakness would put a damper on their biggest export market. (A weaker dollar makes foreign goods more expensive for Americans, meaning Chinese imports would become less “cheap.”)

This view is “slightly naive,” according to Ferguson, author of The Ascent of Money.

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