China To Cut US Dollar Holdings ?  

Posted by Big Gav

One of the forces pushing oil prices lower in recent months (besides the slowing world economy and the demand destruction caused by the earlier surge in prices) has been the rising US dollar. This trend may be nearing an end, as the Chinese look to diversify their US$1.809 trillion (hey - they could pay for half the Iraq war with that stash !) away from the dollar - China may cut its dollar holdings - CICC.

China, which holds a fifth of its currency reserves in Fannie Mae and Freddie Mac debt, may cut the portion held in US dollars, according to China International Capital Corp (CICC), one of the nation's biggest investment banks.

The US government this week seized control of the two mortgage-finance companies, which account for almost half of the home-loan market in the world's biggest economy, to prevent defaults from crippling them. China holds up to $400 billion in the two firms' debt, CICC Chief Economist Ha Jiming said in a report Thursday.

"The crisis has made Chinese officials realize it's a bad idea to put all their eggs in one basket," wrote Hong Kong-based Ha. "This will likely lead to greater diversification of foreign exchange reserve investments."

China held $447.5 billion of US agency bonds as of June 2008, according to the CICC calculations using disclosures by the US Treasury. It is likely to reduce the portion of reserves in dollar assets from the current 60 percent by purchasing more non-dollar assets with new reserves, he said.

2 comments

China inflated it's currency at a stunning 20% last year to prop up the US dollar. While the policy of strong US currency against a weak Chinese currency has led to symbiotic for both countries, it can only be stretched so far.

The Chinese would likely have begun to divest from US dollars after the Olympics ended no matter what...they can't do it anymore. I think the likely result of this for this for the US, given the seeming unwillingness of the Fed to go into recession, is a big surge of inflation.

Ouch I had wondering when China would begin to do this, and just how bad will it hurt.

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