Economic Crisis, World Currency

China Proposes To Cut Two Thirds Of Its $3 Trillion In USD Holdings


All those who were hoping global stock markets would surge tomorrow based on a ridiculous rumor that China would revalue the CNY by 10% will have to wait. Instead, China has decided to serve the world another surprise. Following last week’s announcement by PBoC Governor Zhou (Where’s Waldo) Xiaochuan that the country’s excessive stockpile of USD reserves has to be urgently diversified, today we get a sense of just how big the upcoming Chinese defection from the “buy US debt” Nash equilibrium will be. Not surprisingly, China appears to be getting ready to cut its USD reserves by roughly the amount of dollars that was recently printed by the Fed, or $2 trilion or so. And to think that this comes just as news that the Japanese pension fund will soon be dumping who knows what. So, once again, how about that “end of QE” again?

From Xinhua:

China’s foreign exchange reserves increased by 197.4 billion U.S. dollars in the first three months of this year to 3.04 trillion U.S. dollars by the end of March.

Xia Bin, a member of the monetary policy committee of the central bank, said on Tuesday that 1 trillion U.S. dollars would be sufficient. He added that China should invest its foreign exchange reserves more strategically, using them to acquire resources and technology needed for the real economy.

And as if the public sector making it all too clear what is about to happen was not enough, here is the private one as well:

China should reduce its excessive foreign exchange reserves and further diversify its holdings, Tang Shuangning, chairman of China Everbright Group, said on Saturday.

The amount of foreign exchange reserves should be restricted to between 800 billion to 1.3 trillion U.S. dollars, Tang told a forum in Beijing, saying that the current reserve amount is too high.

Tang’s remarks echoed the stance of Zhou Xiaochuan, governor of China’s central bank, who said on Monday that China’s foreign exchange reserves “exceed our reasonable requirement” and that the government should upgrade and diversify its foreign exchange management using the excessive reserves.

Tang also said that China should further diversify its foreign exchange holdings. He suggested five channels for using the reserves, including replenishing state-owned capital in key sectors and enterprises, purchasing strategic resources, expanding overseas investment, issuing foreign bonds and improving national welfare in areas like education and health.

However, these strategies can only treat the symptoms but not the root cause, he said, noting that the key is to reform the mechanism of how the reserves are generated and managed.

The last sentence says it all. While China is certainly tired of recycling US Dollars, it still has no viable alternative, especially as long as its own currency is relegated to the C-grade of not even SDR-backing currencies. But that will all change very soon. Once the push for broad Chinese currency acceptance is in play, the CNY and the USD will be unpegged, promptly followed by China dumping the bulk of its USD exposure, and also sending the world a message that US debt is no longer a viable investment opportunity. In fact, we are confident that the reval is a likely a key preceding step to any strategic decision vis-a-vis US FX exposure (read bond purchasing/selling intentions). As such, all those Americans pushing China to revalue, may want to consider that such an action could well guarantee hyperinflation, once the Fed is stuck as being the only buyer of US debt.

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  1. In reply…

    When China set out in earnest to dominate world trade some 30 years ago, it did not ask its politicians to determine the nation?s economic ?blueprint?, but its engineers and specifically His Excellency Jian Song, former vice-premier of China for 13-years and an Honorary Member of our Foundation.
    This is a little known fact in the West as Song is the true ?master? of the basis of China?s economic dynamism today. There were five broad-brush critical phases within this world-leading strategy thought out by Song and his eminent colleagues under his control.

    1. Human Capacity Building and Technical Educational Development ? low cost/high human value Strategy
    2. National Economic Stimulation and Internal Market Development ? Mass Internal trade growth and National Savings Strategy
    3. Strategy for Global Manufacturing Dominance, Global Minerals Supply and National Innovation Strategy
    4. Strategy for the Acquisition of Global Assets
    5. Enabling Strategy to Control World Markets

    Under Song?s guidance China started the long applied process to dominate world economics over his 13-year tenure as vice-premier.
    Considering these facts, the West if it is to recapture the high ground in the economic stakes has to supplant its political thinking with innovative thinking likewise from its engineers, scientists and overridingly its independent innovators (the capture of the people?s creative ideas). There is no doubt that China?s economic emergence over the last quarter of a century has been unparalleled and has proved to be a truly enviable success by any standards. It will be even more phenomenal in the future as its global dominance will eventually encompass at least half the world?s economic turnover, equivalent to more than what the USA ever attained by a factor nearly greater than 3.
    Therefore the West on its present path is in for a life-changing experience over the next three decades that will despatch the majority of our future generations to a life of relative poverty with the East. This is not pie in the sky but thinking based upon reality and fact.
    Consequently our politicians in the West have to start anew with their economic thinking and do what China decided to do around four decades ago, create their economic dynamism, not based upon political ideology, but based upon re-engineered creative thinking of their innovative inventors and engineers. That is the only way that the West can ever have a hope of re-engaging substantially in the future of world of economics on a supportable and totally sustainable basis. For all other thinking will fail us to our great regret and with colossal human misery for many centuries to come it has to be said. Yes, we are certainly dealing with centuries here, for once the high ground has predominantly been taken up by SE Asia and China?s unassailable economic lead, the West will find it near impossible to retake any of the world markets back. That is how bad it will get and we have better get used to it due to our western political thinking on the economic front.

    Dr David Hill
    Executive Director
    World Innovation Foundation

    Ps. part of the masterplan was to undermine the US dollar with its replacement with a new world currency. Something that they have been doing behind closed doors with Kazakhstan and Russia being the front men. They know that there would be no winners in a military conflict so they determined that the great war of the 21st century would be economics. Our western politicians know very little really of what is going on and will only when the dust settles in another two decades. By that time it will be sorrowfully too late to act or do anything about the dire situation then. We are all in for a truly horrendous future and people in high places should really take things seriously now to prevent the worst and take alternative economic policy decisions now. There is only one solution that is outlined above if we have any intelligence at all.

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