China. The Dragon in the Dollar?

FX Strategy Articles > Fundamental articles

There have been lots of articles doing the rounds this week about Central Banks diversifying away for the US dollar. One interesting article came from Australia’s national newspaper aptly named The Australian. It reported that the First Deputy Chairman of the Russian Central Bank had announced that Russia was diversifying its foreign currency holdings away from the US Dollar and hence Russia would purchase US$5 Billion of Australia dollars. This amount equals 1 percent of Russia’s total foreign currency holdings.

Another article which caught my eye was from those informative pink pages – The Financial Times (FT). The FT reported that in the first four months of this year China began doing what it has talked about doing for so long- diversifying away from the US dollar. Standard Charter Bank estimates that China increased its FX reserves by $200 Billion in the first four months of the year but that 75% of these funds were invested in non-US assets.

Currently it is estimated that China holds approximately 60-70% of its FX in US dollars. This figure has remained pretty steady since 2007 even though over the past 4 years China has become increasingly vocal in its desire to reduce its exposure. Perhaps now there is added impetus to diversify as not only is the US fiscal situation precarious but the yields on other currencies such as numerous EU country bonds (eg Greece) or much less risky but still relatively high yielding Kangaroo bonds are too appealing to pass up. The Chinese are Japanese after all! A little yield is a nice thing!

So while China hasn’t yet begun outright selling of its US dollar holdings the shift appears to have started; all-be-it early days.

I’d add a left field possibility into the mix just for some weekend pondering.  If China needed to raise a tonne of cash in a hurry, say to bail out all the local government debt which has ballooned to out of control levels, where would they get the cash from?

My money’s on the Chinese Dragon cashing in a few spare US dollars. Pardon the pun!


By By Friday Fundamentalist, Published on 23rd of June 2011
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