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Beijing warned on dollar holdings

June 7, 2011


U.S. dollar notes are seen in this picture illustration taken at the Bank of Taiwan in Taipei November 11, 2010. REUTERS/Nicky Loh

China is running a major risk in holding so many dollars because the US may deliberately devalue its currency, a senior Chinese official has warned.

The comments by Guan Tao, head of the international payments department in the State Administration of Foreign Exchange, knocked the dollar on Tuesday, adding to fears about the struggling US economy. The dollar fell to a one-month low against a basket of six leading currencies.

Pressure on the dollar has intensified amid heightened concerns that the soft patch in the US economy will ensure that the Federal Reserve sticks to its ultra-loose monetary policy in the near future.

Despite Mr Guan’s concerns, which are often voiced in Beijing, analysts said that China had little choice but to recycle its vast foreign currency reserves into dollar-denominated assets. “The United States has adopted expansionary fiscal and monetary policy to stimulate economic growth,” Mr Guan said in an article that was published on the website of China Finance 40 Forum, a Beijing economic think tank.

“The United States may find it hard to resist the policy temptation of weakening the dollar abroad and pushing up inflation at home,” he added.

The article was removed from the Chinese website after financial markets took notice and the dollar fell.

Mr Guan later told Reuters that he had been expressing his personal opinion. It was not the first time that he has offered blunt criticism of US economic policy.

In the latest issue of Outlook Weekly, a magazine published by the official Xinhua news agency, Mr Guan said that it was necessary to promote diversification of the international currency system and avoid over-reliance on the dollar.

“The dollar is the world’s main reserve currency and settlement currency. This can be expressed as ‘my dollar, your problem’,” he said.

China has $3,045bn in foreign exchange reserves, about two-thirds of which are estimated to be held in dollar-denominated assets. The government has long said that it wants to invest in a wider range of currencies, but it has struggled to implement this strategy in practice.

Any sign that China was turning its back on the dollar would backfire by undermining the value of its existing investments. What’s more, as Chinese officials have themselves said, US debt offers the deepest and most liquid market for the huge amounts of foreign cash that Beijing must manage.

With the Chinese government sensitive to criticism that it is squandering the nation’s savings in dollars, it has in recent years attempted to mask the extent of its US holdings, routing new investments through money managers in London and Hong Kong.

The US Treasury Department revised upwards its estimate of Chinese holdings of Treasury securities by $268bn through the middle of last year.

On the surface, China has cut its Treasuries stash, the world’s biggest, by $15bn this year.

However, a nearly $54bn increase in the UK’s holdings suggests that Beijing is making purchases in London.

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