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January 10, 2006

China Signals A Move Away From Dollars Economy

China's enormous trade surplus with the US provides it with lots of US dollars to invest. To date, China has invested most of those dollars in US Treasury bills and other dollar-based assets: the Chinese central bank holds more than half a trillion dollars worth of such assets. By buying dollar-based assets, China helps to prop up their value. But now, the Chinese are signalling an intention to move some of their money out of dollars, a move likely to depress the dollar's value. Today's WaPo:

China has resolved to shift some of its foreign exchange reserves — now in excess of $800 billion — away from the U.S. dollar and into other world currencies in a move likely to push down the value of the greenback, a high-level state economist who advises [China's] economic policymakers said in an interview Monday.

As China's manufacturing industries flood the world with cheap goods, the Chinese central bank has invested roughly three-fourths of its growing foreign currency reserves in U.S. Treasury bills and other dollar-denominated assets. The new policy reflects China's fears that too much of its savings is tied up in the dollar, a currency widely expected to drop in value as the U.S. trade and fiscal deficits climb.

China now boasts the world's second-largest cache of foreign exchange — behind only Japan — and is on pace to see its reserves climb past $1 trillion later this year. Even a slight diminishing of the dollar as a percentage of those holdings could exert significant pressure on the U.S. currency, many economists assert.

In recent years, the value of the dollar has been buoyed by major purchases of U.S. Treasury bills by Japan, China and oil-exporting countries — a flow of capital that has kept interests rates relatively low in the United States and allowed Americans to keep spending even as debts mount. Some economists have long warned that if foreigners lose their appetite for American debt, the dollar would fall, interest rates would rise and the housing boom could burst, sending real estate prices lower.

The comments of the Chinese senior economist, made on the condition of anonymity because the government disciplines those who speak to the press without express authorization, confirmed an analysis in Monday's Shanghai Securities News stating that China is inclined to shift some its savings into other currencies such as the euro and the yen, or into major purchases of commodities such as oil for a long-discussed strategic energy reserve. [...]

"We believe this adds to the downside pressure the USD [U.S. dollar] is currently facing," Green wrote. "It is the first official expression from [China] that they are looking at switching away" from the dollar. [Emphasis added]

China has to tread carefully or the value of their dollar holdings will fall, but, given the long-term imbalances in the US economy, one can hardly blame them for feeling nervous about piling up dollars ad infinitum.

Posted by Jonathan at January 10, 2006 05:07 PM  del.icio.us digg NewsVine Reddit YahooMyWeb


The upcoming Iranian Oil Bourse in March probably influences Chinas decision to sterr away from the US dollar too...

Is it mere coincidence that the Fed will begin hiding M-3 the same month that Iran will launch its Iran Oil Bourse, or is there a direct threat to the stability of the U.S. dollar, the U.S. economy, and the U.S. standard of living? Are Americans being set up for a collapse in our economy that will make the Great Depression of the 1930’s look like a bounced check?

Posted by: Lyle V Sansom at January 11, 2006 02:25 PM

Thanks for bringing this alarming news to my attention. I've long thought it foolish that the U.S. has constructed this wonderful house of cards out of our foreign debt that is just waiting to collapse. News like this always makes me hold my breath to see if this is that card that when pulled out, causes it all to come tumbling down.

I've incorporated the WaPo article in a post of my own here, if you're interested.

Posted by: JesseJenkins [TypeKey Profile Page] at January 12, 2006 11:02 PM