China, Yuan and Dollars
Chinese investors, including the central bank, are the second- largest foreign holders of Treasuries, with $194 billion in December, according to the U.S. Treasury Department. Holdings of Treasuries almost doubled from $118.4 billion at the end of 2002. Japanese investors are the biggest with $712 billion.
Seventy-six percent of China's reserves, the world's second- largest, were in dollars last year, down from 82 percent in 2003, Lehman said in an analysis yesterday of figures published by the People's Bank of China. China spent 1.6 trillion yuan ($193 billion) buying foreign currency in 2004 to maintain the yuan's fixed exchange rate at about 8.3 per dollar, 41 percent higher than 2003, the central bank said on Feb. 28. Foreign reserves rose to a record $610 billion, according to People's Bank of China figures.
75% of total Chinese reserves are held in US securities, that means China currently holds slightly more than $450 billion in dollar assets. That exposes China to a big portfolio loss in the event of a sharp depreciation of the US currency; for every 15% drop in the dollar, there would be a $75 billion position loss — the equivalent of about a 5% hit on Chinese GDP.
Moreover, there is good reason to believe that the Chinese FX reserve build-up will continue at a rapid pace — an outgrowth of a persistently wide US current-account deficit, a pegged RMB exchange rate, and reduced dollar exposure of other central banks. If, as a result, China’s dollar reserves increase by approximately $200 billion per year, then a 15% loss in the dollar would be the equivalent of about 9% of Chinese GDP by 2008 — hardly trivial by any means. A good reason to unpeg?
Investors have been betting on a change in China's currency since 2002, according to trading of non-deliverable forward contracts. The yuan would rise to 7.9273 against the dollar in a year if freely traded, the contracts showed. The implied rate was at 7.937 late yesterday in Asia. Today the yuan is pegged at 8.23 to the dollar.
An unpeg would immediately increase the yuan by 4.3% over the dollar, that could be an even bigger disaster for China's economy. What will they do?
Morgan Stanley: The Paradox of Stability
Bloomberg: China Reduces Dollars
Seventy-six percent of China's reserves, the world's second- largest, were in dollars last year, down from 82 percent in 2003, Lehman said in an analysis yesterday of figures published by the People's Bank of China. China spent 1.6 trillion yuan ($193 billion) buying foreign currency in 2004 to maintain the yuan's fixed exchange rate at about 8.3 per dollar, 41 percent higher than 2003, the central bank said on Feb. 28. Foreign reserves rose to a record $610 billion, according to People's Bank of China figures.
75% of total Chinese reserves are held in US securities, that means China currently holds slightly more than $450 billion in dollar assets. That exposes China to a big portfolio loss in the event of a sharp depreciation of the US currency; for every 15% drop in the dollar, there would be a $75 billion position loss — the equivalent of about a 5% hit on Chinese GDP.
Moreover, there is good reason to believe that the Chinese FX reserve build-up will continue at a rapid pace — an outgrowth of a persistently wide US current-account deficit, a pegged RMB exchange rate, and reduced dollar exposure of other central banks. If, as a result, China’s dollar reserves increase by approximately $200 billion per year, then a 15% loss in the dollar would be the equivalent of about 9% of Chinese GDP by 2008 — hardly trivial by any means. A good reason to unpeg?
Investors have been betting on a change in China's currency since 2002, according to trading of non-deliverable forward contracts. The yuan would rise to 7.9273 against the dollar in a year if freely traded, the contracts showed. The implied rate was at 7.937 late yesterday in Asia. Today the yuan is pegged at 8.23 to the dollar.
An unpeg would immediately increase the yuan by 4.3% over the dollar, that could be an even bigger disaster for China's economy. What will they do?
Morgan Stanley: The Paradox of Stability
Bloomberg: China Reduces Dollars
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