Senior Chinese officials, including Wen Jiabao, the premier, have repeatedly signalled concern that US policies could lead to a collapse in the dollar and global inflation. But Chinese and western officials in Beijing said China was caught in a “dollar trap” and has little choice but to keep pouring the bulk of its growing reserves into the US Treasury, which remains the only market big enough and liquid enough to support its huge purchases.
In March alone,
“Because of the sheer size of its reserves Safe [China’s State Administration of Foreign Exchange] will immediately disrupt any other market it tries to shift into in a big way and could also collapse the value of its existing reserves if it sold too many dollars,” said a western official, who spoke on condition of anonymity.
The composition of China’s reserves is a state secret but dollar assets are estimated to comprise as much as 70 per cent of the $1,953bn total and China owns nearly a quarter of the US debt held by foreigners, according to US Treasury data.
The collapse of Fannie Mae and Freddie Mac, the
This approach is widespread in the market because of expectations that the
But Safe has not fundamentally changed its strategy of allocating the bulk of its burgeoning foreign exchange reserves to US Treasury securities, a western adviser familiar with Safe thinking told the Financial Times.
He said Safe traders were “very negative” on sterling because of expectations of renewed weakness of the
The pound ended last week at its strongest since December, shrugging off a warning over the
The US dollar fell to its lowest level of the year against major currencies last week. Treasury yields spiked to six-month highs as investors focused on the willingness of creditors to fund a deficit that was expected to be about 13 per cent of gross domestic product this year.
As its reserves soared in recent years, Safe began trying to diversify away from the dollar, It has been adding to its gold stocks and taking small equity stakes in publicly listed companies all over the world.
Over the long term,
Chinese outbound foreign direct investment nearly doubled from 2007 to $52.2bn last year.