China Losing Confidence In The Dollar
China Losing Confidence in the Dollar
http://www.washingtonpost.com/wp-dyn...901042_pf.html
By Peter S. Goodman
Washington Post Foreign Service
Monday, January 9, 2006; 3:51 PM
SHANGHAI, Jan. 9 -- As China's industrial juggernaut has flooded foreign ports with cheap factory-made goods in recent years, its central bank coffers have filled with the bounty flowing back to these shores -- a stash of foreign exchange now exceeding $800 billion. China's leaders have steadily invested the bulk in one primary vehicle: the U.S. dollar.
But on Monday came the latest recent sign that China has grown worried about tying its savings so closely to the dollar, a currency that many economists think is due for a fall. A senior economist at China's State Council -- the equivalent of the cabinet -- said in an interview that China is moving toward a new policy of buying fewer U.S. Treasury bills while shifting slightly toward buying assets that trade in other currencies.
China now boasts the world's second-largest stock of foreign exchange reserves after Japan, and with roughly three-fourths of those holdings now invested in the U.S. dollar and dollar-backed assets such as bonds and real estate, even a slight shift in the composition of China's investments could push the value of the greenback down, some analysts said.
The comments of the senior economist, made on condition of anonymity because he is not authorized to speak to the press, confirmed an analysis in Monday's Shanghai Securities News stating that China is inclined to shift some its savings into other currencies such as the euro and the yen, or into major purchases of commodities such as oil for a long-discussed strategic energy reserve.
In a report circulated this week, Stephen Green, senior economist with Standard Chartered Bank in Shanghai, identified several signals that China is intent on limiting its exposure to the dollar -- not least, a recent pledge from the State Administration of Foreign Exchange to "actively explore more efficient use of our foreign exchange reserves."
"We believe this adds to the downside pressure [the U.S. dollar] is currently facing," Green wrote. "It is the first official expression from SAFE that they are looking at switching away" from the dollar.
The comments on SAFE's Web site reinforced earlier public warnings from Yu Yongding, an economist on the monetary policy committee of China's central bank, that the country's reserves are now vulnerable to a drop in the value of the dollar.
"The general trend for the U.S. dollar is continuously weakening," Yu said, speaking to reporters on the sidelines of a conference in Beijing last month. "Countries with huge foreign exchange reserves will have their assets shrunken."
Last week, Hu Xiaolian, director of the foreign exchange administration, said China plans to "optimize the structure" of its reserves. Analysts took that to mean China would pursue a higher return that it can get from holding dollars by diversifying its reserves.
Many economists anticipate a significant slide in the value of the dollar if the United States' trade and fiscal deficits continue growing. In recent years, the dollar has been propped up by aggressive purchases by China, Japan and oil-exporting countries. Some economists warn that this has made U.S. prosperity dependent on the willingness of foreign powers to continue financing America's profligate ways. If foreigners lose their appetite for U.S. Treasuries, the dollar would drop, increasing the cost of imported goods in the United States and likely forcing the U.S. Federal Reserve to lift interest rates, perhaps bursting what is widely seen as an investment bubble in the real estate market, sending prices plummeting.
But some economists say this analysis is flawed: Were China and Japan to engineer a significant fall in the dollar, those nations would suffer the consequences -- sharply diminished exports as American lose spending power, plus a drop in the value of their dollar assets.
"It is thus extremely unlikely that China would do anything to harm its own balance sheet," wrote Stephen Jen, an economist with Morgan Stanley, in a research note distributed Monday.
China continues to amass foreign exchange reserves at a pace of roughly $15 billion per month, a pace that would see it exceed $1 trillion later this year.
Warnings about an impending Chinese sell-off in dollars emerged in July, as China slightly altered the way it sets the value of its currency, the yuan, bumping it up against the dollar by about 2 percent. At the time, China announced that it would gradually allow greater movement in the exchange rate -- something that has yet to materialize -- while also shifting from a system in which the yuan moves with changes in the dollar to one where it tracks a basket of currencies including the yen, the euro, the Hong Kong dollar and the South Korean won.
The move temporarily muted criticism on Capitol Hill from those who accuse China of currency manipulation, asserting that an artificially low yuan has made China's goods unfairly cheap on world markets. But as the implications of the new currency policy rippled out, some analysts suggested that China would thereafter have less need for dollars and greater need for the other currencies in the new basket, sending the greenback down and risking higher U.S. interest rates that would dampen economic growth.
China sought to quash such talk. In September, a senior central bank official told a ballroom full of international executives gathered in Beijing that China would not sell significant quantities of U.S. bonds, cognizant that such a move would "cause the price to plunge."
Special correspondent Eva Woo contributed to this report.
© 2006 The Washington Post Company
