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WP: China Losing Confidence in the Dollar [View All]

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UpInArms Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Jan-09-06 05:10 PM
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WP: China Losing Confidence in the Dollar
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http://www.washingtonpost.com/wp-dyn/content/article/20...

SHANGHAI, Jan. 9 -- As China's industrial juggernaut has flooded foreign ports with cheap factory-made goods in recent years, its central bank coffers have filled with the bounty flowing back to these shores -- a stash of foreign exchange now exceeding $800 billion. China's leaders have steadily invested the bulk in one primary vehicle: the U.S. dollar.

But on Monday came the latest recent sign that China has grown worried about tying its savings so closely to the dollar, a currency that many economists think is due for a fall. A senior economist at China's State Council -- the equivalent of the cabinet -- said in an interview that China is moving toward a new policy of buying fewer U.S. Treasury bills while shifting slightly toward buying assets that trade in other currencies.

China now boasts the world's second-largest stock of foreign exchange reserves after Japan, and with roughly three-fourths of those holdings now invested in the U.S. dollar and dollar-backed assets such as bonds and real estate, even a slight shift in the composition of China's investments could push the value of the greenback down, some analysts said.

The comments of the senior economist, made on condition of anonymity because he is not authorized to speak to the press, confirmed an analysis in Monday's Shanghai Securities News stating that China is inclined to shift some its savings into other currencies such as the euro and the yen, or into major purchases of commodities such as oil for a long-discussed strategic energy reserve.

<snip>

Many economists anticipate a significant slide in the value of the dollar if the United States' trade and fiscal deficits continue growing. In recent years, the dollar has been propped up by aggressive purchases by China, Japan and oil-exporting countries. Some economists warn that this has made U.S. prosperity dependent on the willingness of foreign powers to continue financing America's profligate ways. If foreigners lose their appetite for U.S. Treasuries, the dollar would drop, increasing the cost of imported goods in the United States and likely forcing the U.S. Federal Reserve to lift interest rates, perhaps bursting what is widely seen as an investment bubble in the real estate market, sending prices plummeting.

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