China's SAFE Warns Excessive Dollar Holdings Risky, Promptly Retracts Statement

Tyler Durden's picture

For the nth time, China let loose that "excessive" holdings of US dollars are risky because "Washington could pursue a policy to weaken the dollar, a senior currency regulator said in comments published on a website that briefly pushed the dollar lower." Oddly this time, the statement which came from Guan Tao of China's State Administration of Foreign Exchange (SAFE) which is the entity responsible for managing the country's $3+ trillion in USD FX holdings, was promptly retracted, following an announcement by Tao to Reuters "that the comments had been made in private academic discussions and represented his personal view only." In other words this is an identical episode to the one when the BOC's Mark Carney told "a private circle" that the US is going to hell in a handbasket. While the announcement briefly pushed the dollar lower, is the take home message that everyone is secretly hating America, while in public keeping a rosy appearance? The answer, of course, is a resounding yes.

From China Daily:

"We must be alert to economic and political risks in excessive holdings of US dollar assets," said Guan, head of the international payment department at SAFE, in the article on the website of China Finance 40 Forum, a Beijing-based think tank of Chinese economists, bankers and officials.

"The United States has taken an expansionary fiscal and monetary policy to stimulate economic growth, and the United States may find it hard to resist the policy temptation of weakening the dollar abroad and pushing up inflation at home," he said.

The dollar, broadly lower on the day because of market concerns about the health of the US recovery, edged slightly lower after Guan's remarks. It hit a one-month low against a basket of currencies and the euro and a record low versus the Swiss franc.

Chinese officials have blamed ultra-loose US monetary policy for fuelling global inflation and asset bubbles but they tend to be less vocal about China's huge holdings of US assets for fear of roiling the currency market.

At times though, top Chinese officials, including Premier Wen Jiabao, have publicly called on the United States to ensure the safety of Chinese holdings of US assets.

The other part of the retracted message naturally involved the fate of the world's reserve currency. Not surprisingly, the push continues to be one of replacing the USD with the CNY:

Market conditions are favorable for China to forge ahead with market-based reforms of the yuan regime, Guan said, adding however that there is no basis for any sharp yuan rise. "Recent improvements in the current account balance, especially in the trade balance, have shown that there is no basis for the yuan to appreciate significantly," Guan wrote.

As such, the timing is good now for China to improve the yuan exchange rate formation mechanism, he said without elaborating.

"The market conditions for two-way movement of the yuan exchange rate are gradually coming into existence," Guan said.

The only question is when will China decide to finally go public with all these "academic" concerns... and not only go public but announce the long overdue JV with Russia and Germany on what the new "SDR" will be, now that the IMF has been lobbed into utter irrelevancy, and it is mostly China doing the backstopping of virtually every bankrupt European nation. We wonder how long before said backstopping crosses the Atlantic.