China Ditches The Dollar (Sort of)!
- Avalanches start with imperceptible movement of ice and then it roars. Keep an eye on this. It may be the start of the move to dump the USD worldwide. No country wants to be behind China in the dumping of US denominated paper assets. With something like US$1.5T – 2.0T to dump, any sudden moves by China is a ‘nuclear’ event in the financial markets. The FedRes will have to buy all that China dumps on top of their monetization of current annual deficit of about US$1.5T. It will be highly inflationary.
China ditches the dollar (sort of)!
China has earned a reputation as a hypocritical investor over the past few years. It has repeatedly warned the US that quantitative easing was debasing the dollar, only to turn around and plough even more of its vast foreign wealth into dollar-denominated assets.
But perhaps those warnings weren’t so hollow after all. The latest data from the US Treasury suggests that China has in fact executed a major diversification away from the dollar.
The Wall Street Journal’s Tom Orlik has parsed the numbers to produce quite a startling revelation. The portion of China’s foreign exchange reserves invested in dollars appears to have fallen from 65 per cent at the end of June 2010 to 54 per cent a year later.
These figures are unavoidably rough. China does not publish the composition of its $3.2tn foreign exchange reserves and the US is one of the few countries to give a breakdown of which foreigners hold its assets.
However, Orlik is an authority on Chinese economic data and his estimates are as good as any out there. The point is not that China has been selling dollars; rather, it appears to have been accumulating them at a slower rate and instead investing much more in other currencies.
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