This can't be good

[Ocotillo]

Worry as Chinese reserves poised to touch historic US$1 trillion level

17.01.06
By Nerys Avery


BEIJING - China's foreign-exchange reserves rose to a record last year, almost matching Japan's as the world's largest, as a swelling trade surplus and money inflows betting on a currency revaluation boosted holdings.

The People's Bank of China said reserves rose to US$818.9 billion ($1.1 trillion) at the end of December from US$769 billion at the end of September and US$610 billion a year earlier.

Japan's foreign-exchange reserves stood at US$824 billion at the end of November.

China has been investing its reserves in US government debt and held US$247 billion in treasury bonds at the end of October, making it the largest investor after Japan. The bank said the Government was looking for new ways to invest the money to seek higher returns.

"The bigger the reserves get, the more nervous China is likely to be about keeping them predominantly in US dollars," said Julian Jessop, chief international economist at Capital Economics in London.

"China's probably not going to do a lot with its existing reserves but what it might do is put a smaller portion of its new reserves into US dollars."

The nation's reserves of foreign currency, which economists estimate are between 70 per cent and 80 per cent in US dollars, have almost tripled since the end of 2002, lifted by about US$170 billion of foreign investment, a ulative trade surplus of US$160 billion and billions of dollars of capital inflows betting on a rising yuan. China revalued its currency by 2.1 per cent against the US dollar in July and is under pressure from the US, Europe and Japan to let the yuan appreciate more.

The central bank bought US dollars from commercial banks first to maintain the yuan's peg against the greenback. Since the July 21 revaluation, it has bought US dollars to limit the currency's gains, which have been kept at a total of 0.5 per cent.

The European Commission told its governments that China might invest more of its reserves in other currencies, putting pressure on the US dollar.

"There has been indications China could begin to diversify foreign-exchange reserves away from US dollar assets, something that could put downward pressure on the US dollar," the commission said in its report.

Yi Gang, Vice-Governor of the People's Bank of China, said late last year China's policy of diversifying its foreign exchange reserves had long been part of the central bank's strategy.

Seeking to slow growth in foreign-exchange reserves, the Government has relaxed some currency controls. It now allows Chinese companies and individuals to take more money out of the country and, on January 5, scrapped the limit on investment overseas by domestic companies.

Even so, Standard Chartered Bank economists Stephen Green and Tai Hui said China's reserves might rise by another 20 per cent to US$1 trillion by the end of this year - the first time any nation's reserves have reached that level.

"The biggest challenge for the central bank is to control the potential inflation that comes along with the buildup in reserves," said James McCormack, head of Asia sovereign ratings at Fitch Ratings in Hong Kong.

Plenty in hand
* China's foreign exchange reserves hit US$818.9 billion at the end of December.
* It is almost level-pegging Japan's US$824 billion.
* Economists think China's reserves could grow another 20 per cent by year's end.
* That would mean US$1 trillion - a world first.

Wasn't in Lenin who said the capitalists will sell us the rope with which we hang them?

[Extra Stout]

When China moves away from buying dollars, the dollar will weaken against the yuan. That is not so big a deal because it will diminish the trade imbalance with China.

The bigger concern is that with the structural deficit being so large, a change in Chinese foreign currency strategy will cause a big boost in interest rates in the United States.

[Nbadan]

It's the double-whammy against the dollar which should be a concern. Petro-countries moving to dealing Oil for Euro's instead of dollars, as well as the Chinese and other Asians countries who have been most responsible for the ridiculously low interest rates available to American home-buyers and that credit drying up, making financing for expensive goods costlier for consumers.