One of the key news from the past week was that Chinese FX reserves passed a record $3 trillion for the first time, a surge of $200 billion in the first quarter alone. And with the bulk of that in dollar, it is not surprising that the recently collapse in the dollar has forced more posturing out of both the PBoC and SAFE (the State Administration of Foreign Exchange). In comments published Tuesday, Zhou Xiaochuan, governor of the People's Bank of China said that China's huge stockpile of foreign exchange reserves have become excessive and the government must diversify investments using the reserves. "Foreign exchange reserves have exceeded our country's rational demand, and too much accumulation has caused excessive liquidity in our markets, adding to the pressure of the central bank's sterilization." That this is a not so subtle hint aimed at the dollar was confirmed earlier today by SAFE which said that the US government should take responsible measures to protect the interests of investor. "U.S. Treasuries reflect the credit of the US government and are an important investment product for domestic and international institutional investors," the ministry said in a statement carried today on SAFE's website. "We hope the U.S. government takes responsible measures to protect investor interests." Alas, with the US administration solely focused on making confetti out of the US currency, we hope that China is not holding its breath too long. On the other hand, should the DXY take out its 2009 lows, all bets will surely be off and only another market collapse will be able to generate a potential flight to safety in the dollar. In the meantime, both gold and silver continue to benefit, and the only thing that appears to be able to drag down precious metals at this point is a wholesale margin call invoking cross asset liquidation.
From China Daily:
"The State Council has required a cut in excessive accumulation and good management of the funds accumulated, including diversification of investments," Zhou was quoted as telling a forum at Tsinghua University in Beijing.
To keep the yuan exchange rate stable in a capital account control system, the PBOC injects huge amounts of yuan into the banking system by buying foreign currencies from commercial banks.
The central bank then soaks up the excess yuan in the system via open-market operations and higher bank deposit reserve requirements. This is to prevent the money from flowing into the economy and fuelling inflation.
The newspaper did not quote Zhou as giving any details on the diversification of foreign exchange reserve use, although Chinese economists have urged the government to buy more assets in other currencies, such as euro and yen, as well as to invest in strategic goods such as oil and non-ferrous metals.
Commenting on other aspects of China's economy, Zhou was quoted as saying that the central government was considering letting local authorities issue municipal bonds for the first time as the main avenue for future financing of regional infrastructure construction. Local governments have so far relied mainly on sales of land for such financing, supported by quasi-treasury bonds issued by the central government on their behalf or special funds.
And from Market News:
The State Administration of Foreign Exchange cited a call from the Ministry of Foreign Affairs a day earlier which noted the recent move by Standard & Poor's to cut the outlook on the U.S. government's AAA rating to negative.
China is the largest holder of US Treasuries, officially totalling $1.15 trillion as at the end of February. Federal Reserve Chairman Ben Bernanke said earlier this year that China holds "at least" $2 trillion in U.S. government securities, once buying by third country nations is taken into account.
The People's Bank of China said last week that Chinese foreign exchange reserves rose $197.3 billion over the first quarter of this year to $3.04 trillion. PBOC Governor Zhou Xiaochuan said Monday that China has more reserves than necessary, and should cut the pace of accumulation.
At this point even the smallest hint that China's central bank is formally accumulating gold will likely be the spark that causes the next leg up in gold, to its inflation adjusted all time high of $2,400. Judging by the increasing posturing out of Chinese authorities this won't take long.