The problem with China’s monetary reserves.
It is commonly known that China holds by far the world’s biggest stockpile of foreign-exchange reserves. You might think this is good for country, which it off course is, but there is a downside to it. These reserves consist of foreign currencies. To be more specific: about 65% of these holdings are in dollars. In the current economic and financial situation, China finds itself in a bit of a pickle. Over the past weeks, the US have pressured China to release the Yuan, in order to let it appreciate against the dollar. Now, if China does such thing, it would have to deal with severe losses on its dollar holdings. So China wants to get rid of the dollars and diversify its reserves. But if it sells its dollars to buy for example yen, the dollar’s exchange rate might drop. And currently both currencies are still tied, so if the dollar drops, the Yuan does too. So it looks like China’s sky-high monetary reserves were merely wishful thinking,Sarah Duurloo
In need of a bigger boat
The Economist
October 16th 2010
The Economist
October 16th 2010
I think China is taking a big risk by trying to delay an appreciation of their currency. I can understand why they are doing this. A lower currency means a higher level of competitiveness compared to other countries, a booming export and an extremely fast growing economy. However, they should be aware of the fact that one day they will have to accept an appreciation of their currency because it is not possible to hold this position. This appreciation, however, means that China’s competitiveness is going down after all.
BeantwoordenVerwijderenJonas Van der Slycken
Rank Country Billion USD (end of month 2010)
BeantwoordenVerwijderen-- People's Republic of China $ 2648.3
-- Eurozone $ 753
-- United States $ 129
I have found on wikipedia that China has more than twice as much monetary reserves as the Eurozone and U.S. together. So I can only confirm the risks that China is taking. But as far as I know China, I think they are more concerned about finding ways to reduce the risks of these reserves than to replace the US dollar with a sovereign reserve currency, which is a much more complicated issue. Maybe the risk of government bonds associated with dollar devaluatin has to lower first before China can make new purchases.
Matthijs Vanrapenbusch