XMFSinchiruna (28.56)

China may cut its U.S. Dollar holdings...

September 12, 2008 – Comments (6)

It comes across the wires as a whisper, not even picked up by Reuters or AP... but this is an enormous development... and one that I've been anticipating for some time. Note they are not threatening to sell vast portions of their dollar assets, which would trigger the mother of all dollar drops, but rather stating that new reserve funds will likely focus on diversification into other currencies and non-agency debt. In other words... they're saying they will essentially cease to bankroll the irresponsible level of U.S. spending, and I believe the Treasury will be hard pressed to find enough buyers if China is not buying. This leads to the highly unenviable position where the Fed and the Treasury will have to cover each other (Treasury asks Fed to place some new ones and zeros in their computer, issues Treasuries to pay back the Fed, and then relies upon the Fed to purchase those Treasuries). If the rating agencies were actually doing their job, that would lead to a lowered credit rating for the dollar, which would lead more countries to start 'diversifying'.This does not paint a pretty picture for the U.S. Dollar!!

http://www.chinadaily.com.cn/china/2008-09/12/content_7020656.htm

China may cut its dollar holdings

China, which holds a fifth of its currency reserves in Fannie Mae and Freddie Mac debt, may cut the portion held in US dollars, according to China International Capital Corp (CICC), one of the nation's biggest investment banks.

The US government this week seized control of the two mortgage-finance companies, which account for almost half of the home-loan market in the world's biggest economy, to prevent defaults from crippling them. China holds up to $400 billion in the two firms' debt, CICC Chief Economist Ha Jiming said in a report Thursday.

"The crisis has made Chinese officials realize it's a bad idea to put all their eggs in one basket," wrote Hong Kong-based Ha. "This will likely lead to greater diversification of foreign exchange reserve investments."

China held $447.5 billion of US agency bonds as of June 2008, according to the CICC calculations using disclosures by the US Treasury. It is likely to reduce the portion of reserves in dollar assets from the current 60 percent by purchasing more non-dollar assets with new reserves, he said.

Countries in Asia have stockpiled foreign exchange reserves since the 1997-98 financial crisis to act as a cushion against a run on their exchange rates. That in turn has increased pressure on policymakers to ensure higher returns from more than $4 trillion in assets.

China will expand its investments in corporate bonds and equities, according to Ha. Treasury and agency bonds account for 50 percent and 40 percent of total dollar assets held by the central bank, he wrote.