China signals switch in reserves away from dollar

China signals switch in reserves away from dollar

http://news.ft.com/cms/s/f39fa8e4-7e25-11da-8ef9-0000779e2340.html

By Geoff Dyer in Shanghai and Andrew Balls in Washington
Published: January 5 2006 20:13 | Last updated: January 6 2006 02:43

China indicated on Thursday it could begin to diversify its rapidly growing foreign exchange reserves away from the US dollar and government bonds – a potential shift with significant implications for global financial and commodity markets.

Economists estimate that more that 70 per cent of the reserves are invested in US dollar assets, which has helped to sustain the recent large US deficits. If China were to stop acquiring such a large proportion of dollars with its reserves – currently accumulating at about $15bn (€12.4bn) a month – it could put heavy downward pressure on the greenback.

In a brief statement on its website, the government's foreign exchange regulator said one of its targets for 2006 was to “improve the operation and management of foreign exchange reserves and to actively explore more effective ways to utilise reserve assets”.

It went on: “[The objective is] to improve the currency structure and asset structure of our foreign exchange reserves, and to continue to expand the investment area of reserves.

“We want to ensure that the use of foreign exchange reserves supports a national strategy, an open economy and the macro-economic adjustment."

The announcement came from the State Administration of Foreign Exchange (Safe). It gave no more details about whether this meant a big shift in the investment strategy for Chinese reserves, which according to local press reports reached nearly $800bn at the end of last year and are expected by economists to near $1,000bn this year.

The regulator also said it would end quotas on the amount of foreign currency Chinese companies can acquire to invest in overseas assets, a decision that removes a bureaucratic hurdle facing companies that plan to make international acquisitions.

The statement comes at a time of growing debate in China on how the reserves are invested. Some economists have called on Beijing to use the funds to finance infrastructure investment and clean up state-owned companies, or to invest in higher-yielding assets rather than financing US borrowing.

However, according to Stephen Green, economist for Standard Chartered in Shanghai, although the language was “vague”, Thursday's statement was the first time Safe has publicly indicated a shift away from dollar assets.

“It is a subtle but clear signal that they are interested in moving away from the US dollar into other currencies, and are interested in setting up some kind of strategic commodity fund, maybe just for oil, but maybe for other commodities,” he said.

The Group of Seven leading industrialised economies has repeatedly called for an adjustment in global trade imbalances, including a rise in the renminbi. The US has expressed frustration that China has not allowed its currency to rise significantly after last July’s 2 per cent revaluation. That saw China move from a dollar peg to managing its currency against a basket of currencies, potentially allowing the renminbi to rise against the dollar.

John Snow, US Treasury secretary, speaking earlier on Thursday, repeated his call for China to allow the renminbi to rise against the dollar. “The trade deficit is influenced by lots of things, differential growth rates, differential savings rates and investment rates and so on. But clearly, getting the [Chinese currency] more appropriately valued will be helpful to the global adjustment process,” he said.

However, some economists believe it would be a mistake for China to shift its reserves into domestic investment or other asset classes.

 

Seems like I keep asking this question time and time again, but here we go anyway.

Imagine that you are the Boss Hogg of The Imperial Bank of Some Big Country, and you are planning some moves in the markets. Would you:

A: Tell everybody in advance what moves you will make, so everybody can jump in front of your trades and cut into your profits

or

B: Misdirect like a stage magician so everybody is looking over there while you are doing something over here?

 

TGregg

IMHO the goal of the Chinese was not primarily to profit on their US bond purchases but rather to support the US dollar and in turn underpin their industrial expansion. Once the US has exported the bulk of its industrial base to them and consumers in China and the rest of the world are strong enough to support Chinese industry the Chinese will not longer be so accommodative to US interests, in fact I would imagine that they will become quite hostile.

Thanks to the complete ignorance and incompetence of the US government over the years the Chinese are now at a stage where they can exercise considerable financial muscle, so the statement by the Chinese is IMHO just a warning to the US administration to not push it any further when it comes to China. Similar warnings have been coming from the Middle East, Europe and Russia. Once the US has spent itself into the ground it will find itself with a valueless currency and few friends. Although the demise of the US is a long way away this is just another sign of things to come IMHO.

 

China's move to switch reserves could raise pressure on dollar

http://business.timesonline.co.uk/article/0,,13132-1972871,00.html

JOHN SNOW, the US Treasury Secretary, denied yesterday that China had America in an economic stranglehold as an announcement by Beijing that it will seek to diversify its vast currency reserves fuelled worries that the dollar will come under heavy pressure this year.
The decision by China’s State Administration of Foreign Exchange (Safe) that it will explore a wider range of ways to invest the country’s $769 billion (£437 billion) of currency reserves — the bulk of which are in dollars — could add to a series of factors exerting downward pressure on the US currency, economists said.

The dollar confounded widespread forecasts last year that it would succumb to a broad-based decline. But with the prospect of an early peak in US interest rates and a slowdown in the American economy already tipped by many to weigh on the currency, analysts said China’s move could only add to risks of a significant sell-off at some point this year.

Jim O’Neill, chief economist at Goldman Sachs, said that he already had a bearish view of the dollar, and Beijing’s decision reinforced that view. He expects a further 9 per cent fall of the dollar against the yuan this year, to 7.34 to the dollar, and a dollar drop of 7 per cent against the euro.

Nick Parsons, of Commerzbank, said that he did not expect the dollar to suffer any immediate impact, but that “over three to six months, we could well look back on this as a very important announcement [by Beijing]”.

Gerard Lyons and Stephen Green, of Standard Chartered, agreed that the decision could prove important. “We believe this is a serious dollar negative,” Mr Green said.

With Beijing having piled up as much as $600 billion of dollar assets, which constitute up to 80 per cent of its foreign reserve holdings, an aggressive move by Beijing to switch into non-US assets could trigger a precipitate drop in America’s currency.

This has raised anxieties that China could use this financial muscle as leverage on Washington. But economists said that China would avoid a big or hasty switch from holding US assets, since a resulting slump in the dollar would cause it to lose money on its huge remaining dollar-based holdings. “It would be a self-inflicted wound,” Mr O’Neill said. He and other analysts said Beijing was likely to move only slowly to diversify its reserves by picking a wider mix of assets. “What is more likely is incremental moves,” he said.

Mr Snow echoed this assessment. “Remember, people who own US assets have an interest in seeing that paper sustain its value,” he said. “China is a large holder . . . If the value of our paper were to fall, they would find they had a large loss of net wealth. It’s not in their interests.”

Beijing’s move on reserves came as Safe also said that it would soon scrap foreign exchange quotas on outflows of investment funds from China.

There was speculation that this could make it easier for Chinese institutions to set-up corporate acquisitions abroad. But analysts said that the main significance of the move could be in easing upward pressures on the yuan and domestic inflationary risks in China generated by the big inflows of speculative investment funds into the country. Allowing greater capital outflows would act as a safety valve that would help to ease these problems.

 

Once PRC develops a liquid and transparent bond market, the Japs will turn from US bonds. As PRC's population is far larger than US', the Japs could replace the US consumer with the PRC consumer. What difference would it make to Toyota's president whether Toyota sells Camrys in Beijing or Los Angeles?

The fact Americans don't produce much shows up in Commerce Department's current account data: US' deficit is close to 10% of GDP while other G-7 countries' total trade is less than 10%. Without foreign goods and financing, US is basically a Latin American country.

Facts to consider: US gets about 2MM bbl/day from the Persian Gulf, while Japan gets about 4MM bbl/day; over 16,000 US casualties in Iraq, while Japan has lost about 5. If you want to understand the relationship between the US and Japan, rent the movie "Gallipoli" or "Breaker Morant". As Nakasone said 20 years ago; US is Japan's farm, Europe its boutique, Australia its quarry.

 

i tend to agree with you.
i dont want to even imagine what will happen to the US economy if the chinese decide to reform/put in order their bank system and create a honest and open stock market.

 

People are minimizing China's obstacles with the same speculative fervor that they minimized internet companies' obstacles in the late '90's. Yes, China has done some things well and, yes, the US has made some mistakes but neither is 100% one way or the other and it's foolish to think that China's successes or the US's mistakes are 100% the status quo forever.

It reminds me of a Monty Python sketch where the boys are doing a kids show. One of them says, "Today children, we're going to teach you how to build a box girder bridge! Well, you jolly well put some steel together and there you have it! A box girder bridge!"

Is China going to just flip a switch and get a reformed banking system and an "honest and open stock market"? Some people assume that the road to those goals is straight and simple as it would be in Canada or the US or Sweden.

 

Emotional, politically driven gibberish.

 

Insightful, well written truth. I believe the US will look like Brazil in 20 years.

 

You probably have some insights into that whole moon landing hoax as well.

The sixth best selling book of 1987: The Great Depression of 1990 by Ravi Batra. Doom saying and well reasoned arguments are two very different things.

Most of the weirdos on this board who are lusting for the crushing of America are non-US "Death to Amerikka!" types who haven't had a rational thought since they were potty trained.