China's investments to diversify from Dollar- which will fall
18/02/2007

China Will Make Dramatic Dollar Move Soon- from newsman.com We have been warning readers for some time of the coming monumental shift that will occur when China begins selling dollars in favor of other currencies and gold. A Page One "Money and Investing" story in Thursday’s Wall Street Journal confirmed our worst fears. The Journal reported that with China’s central bank sitting on a stash of $1.07 trillion in foreign currencies, officials are considering a change in its investment strategy that could lead China to decrease its holding in dollar-denominated investments. And that means one thing: a dramatic downward pressure on the U.S. dollar. Far-Reaching Fallout "Following the lead of countries like Singapore, South Korea and Norway, China is starting to look at new ways of managing its investments," the Journal reported. "Together, these moves by central banks have ramifications for financial markets worldwide: fewer steady purchases of investments like U.S. Treasury bonds and more buying of investments that are riskier but have better long-term returns." Some financial experts suggest China could earmark up to $300 billion of its reserves for these more aggressive investments. In late January, Chinese Premier Wen Jiabao said China will "strengthen the management of foreign-exchange reserves and actively explore and expand the channels and methods of using the reserves." Central banks have traditionally invested mostly in cash and government bonds, and a large portion of their holdings is in U.S. dollars, according to the Journal. The official reserves of developing countries are composed of about 60 percent dollars and 30 percent euros, with most of the rest in British pounds and Japanese yen, the International Monetary Fund reports. So any move by China to broaden its investments would mean "buying less U.S. debt" and putting "downward pressure" on the dollar, the Journal warns. In January the chairman of Russia’s central bank, with more than $300 billion in holdings, said it is seeking to spread its investments more widely, and the head of South Korea’s central bank, with $240 billion in reserves, said recently that the bank may also put more of its holdings in different kinds of investments, including stocks. John Nugee, a former Bank of England official who works with central banks for State Street Global Advisors, told the Journal that officials in China "will quietly and slowly gather the expertise" to diversify their holdings. In December, Chinese Vice-Premier Zeng Peiyan said the country should "take advantage of the rather large foreign-exchange reserves to add to the nation’s reserves" of natural resources, which are in great demand in China as the economy expands. China’s reserves have been increasing at the rate of nearly $20 billion a month for the past few years as the export boom floods with country with dollars. If current trends continue, China’s reserves could surpass $2 trillion by the end of the decade. What It Means to You The dollar will continue to weaken. That’s bad for America because it means investors don’t value the U.S. market. Long-term interest rates will rise. The Chinese have helped keep long-term interest rates very low. That has helped stave off a complete collapse of the housing market and a full blown recession. The stock market will suffer as well. The Fed will also have to make the dollar more competitive. Expect rates to rise.

 
 
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