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Sat 7 Jan, 2006 12:02 pm
Oh Oh! There goes the US deficit through the roof and our economy down the toilet. ---BBB
China Signals Reserves Switch away from Dollar
By Geoff Dyer and Andrew Balls
The Financial Times
Thursday 05 January 2006
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 utilize 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 industrialized 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.
BBB, The reason the US wants the Chinese currency to float is because when that happends, our balance of payments decreases.
China doesn't have too many other places to invest their surplus currency, because the economies of other countries -even the EU countries, are having their own problems with deficits and balance of payments.
China is sitting on a pile of foreign bonds, but they're waiting to buy up assets in other countries, but do not want to make the same mistake Japan made during their hayday. Inflation at home, and the devaluation of assets in the US hurt Japan badly, and China understands the risks; a lesson well learned.
The US has a very big problem; our government's huge deficit funded by borrowings only increases interest rates on bonds that will exacerbate inflation at home. Too much US currency circulating in the world markets without the offset of products and services to support it will create inflation. The more money there is in circulation, the less value they will have; inflation.
Unless the companies in the US starts to hire more workers to produce products and services, our country is going to have big problems in the future.
If the feds continue their increase in the interest rates, that will hurt the stock market investments - and therefore the capital needed to invest in more productive capacity.
That is the only solution for our country's survival; to increase payroll and tax revenue to reduce the deficit. Our government has to reduce our national debt, and quit borrowing from future generations.
We know what happens when we spend more than we take in as a family unit. Many families already have heavy credit card debt where they pay upwards of 20 percent interest. If that family keeps increasing their debt, there won't be any money left to buy the essentials just to make the interest payments.
C.I.
I know the US want's China's currency to float to artifically lower our balance of payments problems rather than actually correct the imbalance. But if China stops buying our national debt, we are in a heap of trouble.
BBB
BBB, That is true, but where can China invest their surplus cash? If one looks at productive capacity of the US vs the Euro countries, they're not much different. Germany, France, and Italy are having their own economic problems, so investment in the Euro is no better.
I believe China's best bet is to allocate their investments between the US dollar and the Euro.
BEIJING - China said Tuesday it has no plans to sell dollars from its $800 billion-plus foreign reserves, rejecting speculation that had jolted financial markets and fed speculation about the possible impact on the U.S. dollar. We won't sell off our dollar-denominated assets," a central bank official, Tang Xu, told Dow Jones Newswires.
China's foreign currency regulator said last week its plans for 2006 include "widening the foreign exchange reserves investment scope." That sparked speculation that Beijing might shift some reserves from dollars, the bulk of its holdings, into other currencies.
China's foreign currency reserves are the world's second-biggest after Japan, and traders closely watch how they are handled. Much of the reserves are in U.S. Treasuries, and any move to sell them could influence bond and currency markets.
Financial analysts say China has few options to move assets out of dollars due to the vast size of its reserves, because financial markets in other currencies offer fewer bonds and other assets.
Gold prices have risen to their highest level in nearly 25 years on international markets, partly due to speculation that China and other nations' central banks might shift reserves into precious metals. Gold closed at $546.50 an ounce on Tuesday in Hong Kong, up $4.50 an ounce from Monday's close. That's the highest since March 1981.
Tang, director-general of the central bank's Research Bureau, said foreign reserves were expected to top $800 billion at the end of 2005, up from $769 billion when the last quarterly report was issued in September, according to Dow Jones.
pooh, The reason the Chinese took that stance is the only strategy open to them; if they start selling their holdings in US bonds, whatever else they own will get devalued quickly; a big loss for them. They are in a kind of catch-22 situation; if they sell too much, it'll affect the world currency markets and start a run that will decimate everybody.
It was not that long ago that the Thai bhat affected the world financial markets, and we're looking at a very small economy.
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