J. D. Heyes
May 2, 2011
Amid near-daily reports that the U.S. dollar continues to slide in value comes a report that China, the largest holder of U.S. debt, is considering dumping two-thirds of its dollar reserves, which currently stand at about $3.04 trillion.
According to a report from China’s Xinhua news agency, Xia Bin, a member of the Chinese central bank’s monetary policy committee, recommends Beijing reinvest its foreign exchange reserves “more strategically.” He says China should lower its holdings to about $1 trillion instead.
He’s not alone in making that recommendation. Tang Shuangning, chairman of China Everbright Group, says China’s holdings of the dollar should be somewhere between $800 billion and $1.3 trillion, saying at a forum in Beijing that the country’s current holdings are too high.
That position is further supported by Zhou Xiaochuan, governor of China’s central bank, who said on Monday that China’s foreign exchange reserves “exceed our reasonable requirement,” and that Beijing should begin to diversity its vast pool of dollars.
So it would seem that the Chinese want to get out of the dollar business or, at a minimum, hedge their currency reserve bets by shedding greenbacks in favor of another currency – or several currencies – and other assets.
Why would they do that?
The Chinese are nothing if not shrewd capitalists, perhaps even more so than we are. While American corporations have led the world in economic growth for more than a century, China’s government has had enough business acumen to become the world’s second largest economy, overtaking Japan earlier this year and is on pace to overtake ours, despite some evidence to the contrary.
One analyst, Tyler Durden, writes that while China is likely weary of recycling dollars, they may not have any viable alternative – at least for now, while its own currency, remains devalued (artificially or otherwise).
“But that will all change very soon,” Durden writes. “Once the push for broad Chinese currency acceptance is in play … the USD (U.S. dollar) will be unpegged, promptly followed by China dumping the bulk of its USD exposure, and also sending the world a message that U.S. debt is no longer a viable investment opportunity.”
It’s clear Chinese economic leaders are eyeing alternatives to the U.S. dollar, and why wouldn’t they? The dollar has been sliding for months and many economists see its value further declining due to “quantitative easing” (printing money) policies being pursued by the Fed.
It’s Economics 101. You wouldn’t get rid of something of value, would you?
This article was posted: Monday, May 2, 2011 at 2:16 am