♠ Posted by Emmanuel in China,Credit Crisis
at 9/04/2010 03:42:00 PM
I have continuously reiterated that those gullible enough to hold dollars should not bemoan the consequences of doing so. Recently, Reuters shed light on the foreign exchange reserve holdings of the largest suck--I mean, valued dollar investors on the planet: China. Remember, the PRC is not obliged to and does not report the composition of its reserves to IFIs like the IMF. As it turns out, the two-thirds to 70% allocation in US dollars given by the likes of former blogosphere sparring partner Brad Setser was right on the money. While the euro has made inroads in recent years as a reserve currency, many developing countries like China still hold a lot of greenbacks, For whatever reason, a PRC mouthpiece let is slip that 65% of the country's dollar holdings were in dollars:China on Friday offered a rare glimpse into its foreign exchange reserves, confirming that they are overwhelmingly allocated in dollars, while a central banker said the mountain of cash could face depreciation risks. The Chinese government's currency reserves, the world's largest such stockpile at $2.45 trillion, are held roughly in line with what was described as the global average: 65 percent in dollars, 26 percent in euros, 5 percent in pounds and 3 percent in yen.More interestingly, though, China is once again warning that developing countries face a massive risk in holding reserves that are bound to decline in value through stupid dollar tricks like helicopter drops and other such tomfoolery certain white men are particularly fond of:
The report in the China Securities Journal, an official newspaper, cited unnamed reserve managers. The allocation of Chinese foreign exchange reserves is considered to be a state secret, but analysts have long estimated that about two-thirds are invested in dollar assets.
Separately, Hu Xiaolian, a vice governor with the People's Bank of China, warned that depreciation loomed as a risk for foreign exchange reserves held by developing counties. "Once a reserve currency's value becomes unstable, there will be quite large depreciation risks for assets," she wrote in an article that appeared in the latest issue of China Finance, a Chinese-language magazine published under the central bank.Amen to that, but I hope there will be more follow-through since a 65% or $1.6 trillion dollar allocation certainly requires whittling down. (I will make another post as well on China's efforts in promoting use of the yuan for trade settlement.) Here are some moves mentioned:
She reiterated China's long-standing discomfort with a global financial system dominated by a single currency in the dollar. "The outbreak and spread of the global financial crisis has highlighted the inherent deficiencies and systemic risks in the current international currency system," she said. "A diversified international currency system will be more conducive to international economic and financial stability," she added.
To that end, developing countries must speed up reform of their financial markets, and China would work to promote greater cross-border use of the yuan, she said.
There have been signs in recent months that Beijing has stepped up the pace of diversification of its foreign exchange reserves away from dollar assets. Chinese net buying of Japanese debt has surpassed 1.7 trillion yen this year, far surpassing its record of 255.7 billion yen in 2005. China has also raised holdings of South Korean bonds by 2.48 trillion won ($2.11 billion) in the first seven months of this year from 1.87 trillion won at the end of last year. However, Chinese investors only started buying South Korean bonds in the middle of 2009.China certainly can win the favour of many developing countries by offering a plausible alternative to the defective system that currently lies at the heart of global economic imbalances roiling the world economy. The good burghers of Beijing, it's up to you now to show who wears the pants in global politics.
At the same time, China has slightly cut back its vast holdings of U.S. Treasuries, from $894.8 billion at the start of the year to $843.7 billion in June, according to the most recent data. China remains the biggest single holder of U.S. government debt.
UPDATE: Also see excerpts of a WSJ interview of Hu Xiaolian. Needless to say, I am forming a positive impression of her unlike certain folks in dire need of structural adjustment.
