China Warns of Currency Depreciation


China CurrencyChina's currency reserves are estimated at $2.45 trillion dollars. While hard data is a state secret, some information was obtained from the China Security Journal and reported by Reuters.

Roughly 65% of China's currency reserves are in U.S. dollars, 26% in euros, 5% in pounds and 3% in yen. With such a huge sum outstanding, Chinese officials are afraid of depreciation. Hu Xiaolian, vice governor of the Peoples Bank of China, writing in China Finance said: "Once a currency's value becomes unstable, there will be quite large depreciation risks for assets."

You are probably wondering what China is buying lately. Here are a couple to transactions:

  • China bought 1.7 trillion yen, surpassing the record of 255.7 billion in 2005.
  • They increased their holdings of South Korean bonds to 2.48 trillion won from 1.87 trillion at the end of 2009.
  • China cut back on U.S. treasuries from 894.8 billion to $843.7 billion in June.
  • China may buy more U.S. treasuries in September and maybe more South Korean bonds.

This is a clear warning to the United States: Keep the U.S. dollar stable.

While this may be difficult to prove, the numbers are real. Whenever there is bad news, the dollar is slammed which, in turn pumps up commodities and the stock market, giving the impression that all is well.

China is warning against this kind of game playing and wants the dollar held steady. The world is on a tightrope and the slightest hint of dollar depreciation would turn things upside down in a hurry.

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