Friday, November 26, 2004

Ah, the fine art of reading the tea leaves.
Statistics on the US Treasury Department�s website show mainland Chinese holdings of treasury securities totalled US$174.7bn at the end of September, up from US$172.3bn at the end of August.

Meanwhile China�s foreign exchange reserves rose from US$496.2bn to US$514.5bn, suggesting a fall in the proportion of reserves held in treasury bonds.

The recent slide in the dollar has provoked widespread discussion in China about the possible losses being suffered because of the country�s enormous foreign exchange reserves. Beijing does not give any breakdown of its reserve holdings.

�I think the Chinese monetary authorities are very clever and they must already have taken action,� Prof Yu said. �But I have no information whatsoever about what they are doing.�
Because the US is so dependent on foreign purchases of dollar-denominated assets, there is no need for a move as dramatic as an end to buying for the dollar to be sent into a tailspin. Simply buying less will do the job just as well.

The fact that nobody knows what the People's Bank of China is doing says volumes. The conclusion seems to follow that we have no idea when China will break its current dollar peg. This information suggests to me that a basket peg (although surely heavily weighted with dollars) is much more likely than a simple upwards revaluation of the renminbi.

The big shift could come completely out of the blue. But would it?


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