China's shocking weekend announcement: Proposes to dump the majority of its Dollar Holdings

[alan_coaks_3]

April 25, 2011

All those who were hoping global stock markets would surge tomorrow based on a ridiculous rumor that China would revalue the CNY by 10% will have to wait. Instead, China has decided to serve the world another surprise. Following last week's announcement by PBoC Governor Zhou (Where's Waldo) Xiaochuan that the country's excessive stockpile of USD reserves has to be urgently diversified, today we get a sense of just how big the upcoming Chinese defection from the "buy US debt" Nash equilibrium will be. Not surprisingly, China appears to be getting ready to cut its USD reserves by roughly the amount of dollars that was recently printed by the Fed, or $2 trilion or so. And to think that this comes just as news that the Japanese pension fund will soon be dumping who knows what. So, once again, how about that "end of QE" again?

From Xinhua:

China's foreign exchange reserves increased by 197.4 billion U.S. dollars in the first three months of this year to 3.04 trillion U.S. dollars by the end of March.

Xia Bin, a member of the monetary policy committee of the central bank, said on Tuesday that 1 trillion U.S. dollars would be sufficient. He added that China should invest its foreign exchange reserves more strategically, using them to acquire resources and technology needed for the real economy.

And as if the public sector making it all too clear what is about to happen was not enough, here is the private one as well:

China should reduce its excessive foreign exchange reserves and further diversify its holdings, Tang Shuangning, chairman of China Everbright Group, said on Saturday.

The amount of foreign exchange reserves should be restricted to between 800 billion to 1.3 trillion U.S. dollars, Tang told a forum in Beijing, saying that the current reserve amount is too high.

Tang's remarks echoed the stance of Zhou Xiaochuan, governor of China's central bank, who said on Monday that China's foreign exchange reserves "exceed our reasonable requirement" and that the government should upgrade and diversify its foreign exchange management using the excessive reserves.

Tang also said that China should further diversify its foreign exchange holdings. He suggested five channels for using the reserves, including replenishing state-owned capital in key sectors and enterprises, purchasing strategic resources, expanding overseas investment, issuing foreign bonds and improving national welfare in areas like education and health.

However, these strategies can only treat the symptoms but not the root cause, he said, noting that the key is to reform the mechanism of how the reserves are generated and managed.

The last sentence says it all. While China is certainly tired of recycling US Dollars, it still has no viable alternative, especially as long as its own currency is relegated to the C-grade of not even SDR-backing currencies. But that will all change very soon. Once the push for broad Chinese currency acceptance is in play, the CNY and the USD will be unpegged, promptly followed by China dumping the bulk of its USD exposure, and also sending the world a message that US debt is no longer a viable investment opportunity. In fact, we are confident that the reval is a likely a key preceding step to any strategic decision vis-a-vis US FX exposure (read bond purchasing/selling intentions). As such, all those Americans pushing China to revalue, may want to consider that such an action could well guarantee hyperinflation, once the Fed is stuck as being the only buyer of US debt.

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[booyah-chadly]

Bummer

[Darin]

You know what I find interesting here (By the way, I am not trying to spin/pump this) is how China holds 3+ Trillion in US reserves.

We know roughly that the total USD hard currency in circulation is under 1 trillion, yet China holds 3+ trillion.

So, with all that said, I wonder if many foreign governments intend to sit on & hedge or hold again or keep as reserves IQD.

Would explain a reasonable RV - considering many countries may not just sell it off as it'll be higher value of reserves.

Not sure how that process works, but something to think about.

Makes you wonder how much all these foreign countries may hold.

[wiyakpa]

we as Americans can do something about this in a big way, if we would just not buy there worthless junk.why wait for the government to take care of everything that's how we got into this mess in the first place is it not time to stand up for are self's and say enough is enough and take back are own country.

sorry for the rant just couldn't help it

[Darin]

we as Americans can do something about this in a big way, if we would just not buy there worthless junk.why wait for the government to take care of everything that's how we got into this mess in the first place is it not time to stand up for are self's and say enough is enough and take back are own country.

sorry for the rant just couldn't help it

In all honesty, that is easier said than done.

A lot of Asian countries export some of the goods we use and consume.

Think of how many electronics come from Asian countries

Think of how some of the clothes we wear come from Asian countries

Think of how even parts for cars and other mechanics may come from them as well.

Now, I would not be surprised if there are websites out there that basically state what comes from Asian countries & specifically China.

But, who or how would we remember to tell ourselves "Do not buy?"

[roger01]

Personally, I think that would be an act of war, if it happened any other time but because of the possiblity of the Iraqi dinar RV could possibly even us out, if it RVs at over a dollar. If it doesnt, yes, it's economical for China to do this but the only reason thier society is prospering is because our leaders allowed them to. 10 years ago we were the sole powerhouse. That was not done by mistake, so our leaders thought. Help them and even the playing field. WRONG!!! China doesnt care about us, they never have, and now that we arent in a position to really say much, they show their true colors! COMMUNISTS! I hope they RV high, and we can tell China what to do with their products because if our leaders would stop with this EPA crap and we started manufacturing again, we would sustain ourselves and create much needed jobs at home. To hell with China!

Look at their human rights abuses, they dont care about thier own people, but retaining their dynasty and growing their wealth. What makes you think they give a damn about the US of A?

Edited April 26, 2011 by roger01

[freeze]

You know it's a shame we have anut-less spine-less wack job in the white house. If we had a real President, he would tell China where to stick it and shut ALL Chinese imports. China would go belly up in 2 years without America to buy ther worthless crap. i never bought anything made in China I thought worth a tinkers damn anyway.

The problem, my fellow American, is not about the man's nuts, brains or lack there of but rather about his loyalty to this country and its citizens. A true American would not allow this to happen no matter what wealth derived. There is the founding reason for the birther dispute. Trump maybe a pompus jerk but he does have America's best interests at heart.

This happening is going down and nothing will stop it.....Grin !