A case in point on the recent debate sparked when Chinese officials were rumoured to consider curtailing purchases of US debt
An article here by the WSJ has some good pointers as to why China still relies heavily on US debt, and it would be silly for them to diversify the majority of their FX reserves to another currency/debt market.
Over the days, our readers have also pointed out solid reasoning as for why China may be too hasty in making such a move; and most of them are indeed well-founded. The article here shows pretty much the same reasons pointed out saying that:
- The primary function of China's reserves is to act as insurance policy; in the event of a run on the yuan, China would need to sell dollars quickly (and it's hard to find another asset class that can readily absorb hundreds of billions of dollars in a pinch).
- Selling off US Treasuries could be self-defeating for China. A higher move in Treasury yields (from such comments to halt purchases) would force the PBOC to raise its own rates to avoid the risk of capital outflows - but higher rates are not what China wants right now, when the property market and domestic investment both slowing.
The dollar has been under heavy pressure this week, and even though China retracted those earlier comments - it still failed to give the dollar a lift. Yesterday's PPI numbers made things worse for the dollar, and if today's CPI data disappoints as well that could be the final nail in the coffin for any chance of a dollar rally in the coming week.
