China’s foreign exchange reserves Oct.18/07
Forexmentor.com Forex Trading Price Action
www.forexmentor.com News: China’s foreign exchange reserves have swelled to US$1.43-trillion – more than Canada’s yearly economic throughput. The question is, what will China do with all that money? Foreign governments have more than $5.6-trillion in foreign reserves, a quarter of which is held by China. That amount is much more than the central banks need to protect their own local currencies.
China, Russia and several Middle East countries are using so-called sovereign wealth funds (state-run money managers) to shop around for higher returns. These funds are on the look-out for diversification and better returns. Where those funds invest their resources could have a profound impact on key currencies – more specifically, the U.S. dollar. A high degree of volatility in the financial markets could be the net effect of their investment decisions. As much as $1.2-trillion could eventually be shifted out of U.S. dollar holdings, and into the yen and non-euro holdings.
Worries abound that, if China dumps U.S. treasuries en masse, it would further exacerbate the U.S. dollar’s woes. But, China currently plays the role of virtual banker to the U.S. Treasury. Any precipitous withdrawal from U.S. asset classes would only serve to further devalue its own holdings, as the greenback spirals down further and faster. As well, China clearly needs the U.S. consumer – at least until their own population at large can afford to snap up all those goodies they produce for the American market. Then, watch out below.
Source: The Globe and Mail/Barrie McKenna, Sat., Oct. 13/07
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