Britannia Radio

11:08:00, March 23, 2009 Demystifying Chinese Holdings Of U.S. Assets In a recently published Special Report, our China Investment Strategy service examines China's massive but largely mysterious foreign exchange reserves, especially its holdings of U.S. assets. In an unusual disclosure, Chinese Premier Wen Jiabao publicly expressed his concerns about the safety of China's holdings of U.S. assets, putting the country's massive yet largely furtive foreign exchange assets into the spotlight. Our research finds that China currently has about 64% of its foreign reserves in U.S. assets, a level that has declined gradually from as high as 84% in 2003. The majority of Chinese holdings of U.S. assets are risk free and long-term in nature, but there has been a clear trend in China's reserve holdings that shows a persistent increase in exposure to risky assets and non-U.S. assets over the past five years. Although, China's net purchases of risky U.S assets have dropped sharply since mid-last year, while its net purchases of Treasurys have jumped. This underscores the authorities' reduced risk appetite amid the ongoing global storm. Their reserve diversification process could accelerate again when global financial markets stabilize. Importantly, China's net purchases of short-term U.S. Treasurys have jumped dramatically over the past year, accounting for the majority of the country's total net purchases of U.S. government paper. This is an unprecedented development and a situation that warrants close attention going forward. Click here for more information on our Daily Insights service. Why China should lie about its dollar holdings Advertisement Tuesday, February 24, 2009 Text Size:    From David Galland of Casey Research: On February 11, 2009, a senior Chinese Banking official, one Mr. Luo, went on record following a speech in New York as saying that, despite some misgivings, his country would continue buying U.S. treasuries and otherwise supporting the U.S. dollar. The following quote from the Financial Times captures the moment... Mr Luo, speaking at the Global Association of Risk Management's 10th Annual Risk Management Convention, said: "Except for US Treasuries, what can you hold?" he asked. "Gold? You don't hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option." Mr Luo, whose English tends toward the colloquial, added: "We hate you guys. Once you start issuing $1 trillion-$2 trillion . . . we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do." Reading that citation reminds me of some advice I heard from a currency trader some years ago. "If you want to know what a country has planned for its currency," he said, "listen to what the government says they are going to do, then expect the exact opposite."  Now, if you were the Chinese bureaucrats in charge of such things, and you wanted to lighten your dollar holdings, would you (a) announce that you were going to be a seller and then try to beat everyone to the door, or (b) announce you were going to be buyer and then slip out the exits while no one was looking?