from Follow the Money

The FT is on a roll

January 7, 2006

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China could diversify its reserves out of dollars, but only if it gives up its dollar peg.

And it if it gives up its dollar peg, it will be because China has decided not to add to its (already enormous) reserves, not because it wants to diversify its reserves.

So says the Financial Times

In other words, China is stuck - and perhaps more stuck that it realizes.  It can try to shift from holding low-yielding Treasuries into other dollar-denominated US assets that have a better return.  But even then there are limits: China's dollar weren't fully convertible into an oil company, for example.

There is a good case - as the FT notes - that China already has more reserves than it needs, and it should bite the bullet and make real changes rather than continue to try to fiddle at the margins.  China's dollar holdings are large relative to even its revised GDP, and relative to comparable economies.  China clearly isn't a tiny city-state like Hong Kong or Singapore.   Speaking of small city-states, check out this smackdown of rankings that put city-states that rig their property markets - and perhaps a few other local markets -- at the top of the economic freedom league charts.  

I'll try to have more on East Asian currencies and reserves -- including continued differences between Korea's Finance Ministry and its central bank --  tomorrow.

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