China Stuck in ‘Dollar Trap’
China’s official foreign exchange manager is still buying record amounts of U.S. government bonds, in spite of Beijing’s increasingly vocal fear of a dollar collapse, according to officials and analysts.
Senior Chinese officials, including Wen Jiabao, the premier, have repeatedly signalled concern that U.S. 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 U.S. Treasury, which remains the only market big enough and liquid enough to support its huge purchases.
In March alone, China’s direct holdings of U.S. Treasury securities rose $23.7bn to reach a new record of $768bn, according to preliminary U.S. data, allowing China to retain its title as the biggest creditor of the U.S. government.
“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 U.S. debt held by foreigners, according to U.S. Treasury data. >>>
Richard Fisher, president of the Dallas Federal Reserve Bank, said: “Senior officials of the Chinese government grilled me about whether or not we are going to monetise the actions of our legislature.”
“I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States,” he told the Wall Street Journal.
His recent trip to the Far East appears to have been a stark reminder that Asia’s “Confucian” culture of right action does not look kindly on the insouciant policy of printing money by Anglo-Saxons. >>>
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