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SA Editor Eli Hoffmann
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I am Seeking Alpha's VP Content and Editor in Chief. Working closely with CEO David Jackson, I oversee all SA Content initiatives. I designed Seeking Alpha's Wall Street Breakfast and Market Currents news products, and contribute to them from time to time. I have followed the stock markets for... More
  • China to U.S.: We still need you 0 comments
    Aug 20, 2009 7:54 AM
    China to trim US treasury holdings, diversify Forex reserves

    China sold off 25.1 billion US dollars worth of U.S. treasury bills in June to bring its holdings to 776.4 billion dollars, according to data released by the U.S. treasury Department Monday. This has gratified people in China, whereas the United States keeps a close eye on the move.

    Judging from the perspective of its people, however, China is in an urgent need to alter its structure imbalance with its Forex reserves, so that the value of reserve assets could be preserved and increased.

    U.S. treasury bonds seem to have the good safety and strong fluidity with a higher interest rate than that of same-term bank deposits, and it is exempt from interest tax. Against this rising mist, the devaluation trend of the US dollar will result in an intangible devaluation of its treasury bonds. Under such circumstances, China’s first large-scale reduction of US treasury debt is, beyond any doubt, within the bounds of reason.

    The reduction of US treasury bonds also shows that China "is seeking to diversity its Forex reserves." Such diversification is, nevertheless, poses a complex topic. To date, the main problem China has been facing has two aspects:

    One aspect is to make a scientific value assessment of Forex structure, so as to maximize the return and minimize the risk and, the other aspect is to train the competent personnel well versed in the international game rules, who have rich managerial experience.

    Behind the reserve diversification, there is a diversification choice on excess value. First, China has to retain a certain proportion of US dollar reserves since the nation should have the basic means to ensure emergency or contingency international payments. Second, China must have a certain amount of gold reserves, a strategic national asset to serve as a strong prop or backing at the critical moment and, third, China must keep a certain proportion of other stable currencies, such as the euro, British pound and Swiss franc, to offer a useful hedge against dollar devaluation.

    Besides, the use of Forex reserve should take the substantial form in kind. Since Forex reserves are not money of fiscal resource, the use of the reserves should be made mainly in external investment and international trade, or to purchase large-scale machinery and electrical equipment and sophisticated technologies and to make strategic asset investment or to join investment holding companies, focusing on high-growth investment opportunities where potential returns will exceed the cost of capital. Such an endeavor, however, has already been foiled repeatedly due to trade barriers and "fire walls" put up by a few Western countries.

    Furthermore, granting loans to other countries, or directly buying real estates and housing and purchasing large-scale commodities. The issue on the table now is to acquire a correct appraisal of diversified channels for foreign exchange reserves and define the Forex mix in a scientific way. To diversify foreign exchange reserves and define their scientific, rational structure is the procedure China has to accomplish, and some new areas for investment need badly to be explored.

    China has had "no ability to make other option" before but to shrink U.S. treasury holdings. Today, it must be recognized that China is still unfamiliar with the international game rules and the nation is only a pupil with regard to the performance of capital. People in China could be entirely unaware of "manipulation" by banking tycoons or financiers. So, China is in an urgent need of ace professionals in the banking sector good at strategic investment and management.

    Forex reserves belong to the national wealth, and it is natural and inevitable that the general public pays high heed to their safety. Therefore, while explaining some suspicions to the public to win their trust, confidence and understanding, the relevant departments should also consider it an issue to pander how to conceal their strategic intention to the maximum.

    english.peopledaily.com.cn/90001/90780/9...
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