China Offers Rare Glimpse Into USD-Heavy FX Reserve Composition, Warns Of USD Depreciation Risk
One of the world's bigger financial mysteries: the official breakdown of the Chinese FX reserve balance, received a rare moment of transparency today when the China Securities Journal gave the official tally of the $2.45 trillion stockpile: 65% in dollars, 26% in euros, 5% in pounds and 3% in yen. Which means China holds about $1.6 trillion in dollars, and, courtesy of the (recent record) trade surplus, growing. This distribution is roughly in line with expectations and with the world average FX holdings. Nonetheless, the massive concentration of dollar positions prompted Hu Xiaolian, a vice governor with the
People's Bank of China to warn that depreciation loomed as a risk for
foreign exchange reserves held by developing counties. As Reuters quotes, "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. Most certainly this is a tacit warning for US monetary policy, which is, of course a paradox, since ongoing dollar depreciation is CNY-beneficial due to the ongoing (semi) peg. China would love to have its cake, eat it, and to export twice as much of it if possible.
More from Reuters:
[Hu Xiaolian] 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.
So are recent threats of diversification away from Treasuries overstated? Will China resume buying Treasuries after TIC data confirmed the biggest monthly outflow in recent history of Chinese UST holdings? It appears so, especially given that all the other currencies China could indirectly invest in are potentially of the bring of a rapid move lower.
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.
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.
But analysts have also warned against reading too much into the apparent shifts in the flow of cash from China. Like any investor with commercial interests in mind, Beijing has shown a readiness to shift its strategy depending on what it sees as good buys at the time.
The China Securities Journal laid out the prospects for a shift back to the dollar in the near term.
"It is unlikely that China will increase purchases of Japanese bonds in the coming months because the yen might weaken at any time," the newspaper said.
"China is very likely to increase purchases of U.S. Treasuries in September. The possibility for China to buy more Korean bonds can't be ruled out," it added.