from Follow the Money

Chinese reserve diversification?

January 5, 2006

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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China intends to diversify its reserves ...

In various ways.  More currencies.  More commodities.  And a wider range of dollar assets (I would say an even wider range of dollar assets, China's portfolio is already more diverse than Japan's portfolio nothing but Treasuries and a few agencies)   So reports the FT, drawing on a statement from China's State Administration of Foreign Exchange.

In a brief statement on its website, the government's foreign exchange regulator said one of its targets for 2006 was to "improve the operation and management of foreign exchange reserves and to actively explore more effective ways to utilise reserve assets". 
It went on: "[The objective is] to improve the currency structure and asset structure of our foreign exchange reserves, and to continue to expand the investment area of reserves.

That supports the dollar bear case laid out in this weeks' Economist -- in an article written by the part of the Economist that believes global imbalances matter (no tin foil needed).  

It also supports Stephen Jen's thesis that the CNY will prove to be a 2006 story, not a 2005 story.  Though Jen insists that any change in China's currency policy will have nothing -- absolutely nothing -- to do with resolving global imbalances, since he still thinks imbalances within the dollar zone do not matter.  

Jen has long argued that currency moves aren't central to closing those imbalances in any case, since they won't directly raise US household savings, or spur Chinese consumption.  At least until recently, his core adjustment scenario hinged on higher US interest rates, more household savings as the housing ATM closed, and a stronger dollar.   High rates would raise US savings and lead to dollar strength against some of other major currencies. 

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