Is China about to start dumping its $630 billion in eurozone debt holdings? Maybe not yet, although the FT reports that China's State Administration of Foreign Exchange, the central bank's foreign reserves manager, has "expressed concern about its exposure" to the PIIGS. Obviously, with China moving away from dollar denominated assets for the past six months would represent a "big strategic shift" as "last year, the Chinese were trying to reduce their exposure to dollar assets by buying eurozone assets. This would be a complete reversal." Additionally a Chinese diplomat noted that, "The euro’s fluctuation will have an impact on China’s thinking, but it’s only one element” in any decision to allow the Chinese currency to rise, He Yafei, a vice foreign minister, said, according to Bloomberg." The question then arises of just what assets China would be comfortable holding? Alas, the only readily available answer we can come up with rhymes it old and has 79 protons.
China, which boasts the world’s largest foreign exchange reserves, is reviewing its holdings of eurozone debt in the wake of the crisis that has swept through the region’s bond markets.
Representatives of China’s State Administration of Foreign Exchange, or Safe, which manages the reserves under the country’s central bank, has been meeting with foreign bankers in Beijing in recent days to discuss the issue.
Safe, which holds an estimated $630bn of eurozone bonds in its reserves, has expressed concern about its exposure to the five so-called peripheral eurozone markets of Greece, Ireland, Italy, Portugal and Spain.
Any move by Safe would mark a significant change in direction, as Beijing has been trying to diversify away from the US dollar in recent years by buying a greater proportion of assets denominated in other currencies.
One investor said: “This is a big strategic shift. Last year, the Chinese were trying to reduce their exposure to dollar assets by buying eurozone assets. This would be a complete reversal.”
A spokesman for Safe refused to comment. An estimated 70 per cent of China’s reserves are held in US dollar securities, but the composition and management of the funds controlled by Safe are regarded as state secrets.
However, analysts point out that Safe rarely cuts its existing holdings significantly as it has so much new money to invest every month.
Instead, it reduces the proportion of new investment it devotes to a particular asset, thereby reducing the weighting of that asset in its overall portfolio.
According to the latest figures announced by Safe, the country’s foreign exchange reserves totalled $2,447bn at the end of March, up $174bn in just six months.
Separately, a Chinese diplomat said he was “worried about” the effect of Europe’s debt crisis and the weakness of the euro on the global recovery and China’s country’s exports.
“The euro’s fluctuation will have an impact on China’s thinking, but it’s only one element” in any decision to allow the Chinese currency to rise, He Yafei, a vice foreign minister, said, according to Bloomberg.
China’s official reserves have been growing at a rapid pace for years, driven by inflows of foreign capital, a large trade surplus and restrictive cross-border capital controls.