China to diversify out of U.S. dollars

According to an account published in the Daily Telegraph by Ambrose Evans-Pritchard, the Chinese government is quite anxious about money printing in the United States and the effect this printing could have on China’s dollar denominated reserve assets.

For months now, the Chinese have signalled growing unease with U.S. monetary policy. And now comes the clearest signal yet that they are moving away from the dollar.  Cheng Siwei, a former vice-chairman of the Standing Committee, said point blank that the Chinese central bank was about to actively diversify new reserve assets away from the U.S. dollar and into currencies like the Yen and the Euro.  He also mentioned Gold as an alternative the Chinese are exploring.

The $2 trillion in U.S. dollar reserves the Chinese already have are a sunk cost.  Going forward, the Chinese are free to do as they wish with incremental additions to reserves. To the degree that they sell dollars and buy gold, Yen or Euros, there can only be downward pressure on the U.S. dollar.

Cheng Siwei, former vice-chairman of the Standing Committee and now head of China’s green energy drive, said Beijing was dismayed by the Fed’s recourse to “credit easing”.

“We hope there will be a change in monetary policy as soon as they have positive growth again,” he said at the Ambrosetti Workshop, a policy gathering on Lake Como.

“If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said.

China’s reserves are more than – $2 trillion, the world’s largest.

“Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets,” he added.

The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.

Mr Cheng said the Fed’s loose monetary policy was stoking an unstable asset boom in China. “If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.

“Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down.”

Mr Cheng said China had learned from the West that it is a mistake for central banks to target retail price inflation and take their eye off assets.

“This is where Greenspan went wrong from 2000 to 2004,” he said. “He thought everything was alright because inflation was low, but assets absorbed the liquidity.”

Notice the statements about an asset bubble in China and the admission that loose U.S. monetary policy is a transmission mechanism.  Cheng is right to worry about asset prices in addition to consumer prices as the Chinese economy has a huge amount of overcapacity right now and any inflation is bound to become apparent in asset prices first.

To be sure, there are other voices in Chinese officialdom that are striking a less alarmist tone. One cannot rely on the words of one Chinese official to represent policy makers in China.  And Cheng never said the Chinese are now actively diversifying away from the U.S. dollar. Nevertheless, Chinese officials have been talking along this dollar bearish line for months now and I tend to believe their words will lead to action.

That is, at a minimum, bullish for Gold and bearish for the U.S. Dollar.

Source

China alarmed by US money printing – Telegraph

9 Comments
  1. purple says

    It’s too late for China in this regard. They are in a dollar trap.

  2. doctorx says

    The Chinese are reported to have quietly become the largest gold-producing country. They have to love gold. Since they do more trade w the EU than the Etats-Unis, it makes sense that they denominate that trade in Euros; and in yen when trading w Japan. It’s not so clear to me that the relative value of, say, the Euro v. the dollar has to change just because the Euro becomes more widely used in China-EU trade.

    1. Edward Harrison says

      doctorx, I agree that the signal is more Gold or Silver bullish than it is other fiat currency bullish. The dollar IS at a year’s low against the Euro and the Swiss Franc today though – and this after the Swiss have been trying to talk down their currency. What does that tell you?

      1. doctorx says

        Ed

        I have no answer to your question; I have no coherent idea what the relationship of one fiat currency to another “should” or will be.

        I’m glad to hear that you agree that precious metals are the likely greater beneficiaries of the news you reported on out of China.? I have held/traded gold from the long side since 2001 (after 9/11).? Increasingly AU looks like a longer-term hold as a “permanent” part of a financial portfolio.? In case you didn’t see it, Hulbert had an article last week I liked:

        http://www.marketwatch.com/story/contrarians-see-hope-for-gold-breakthrough-2009-09-04?

        Thanks for the thorough responses-greatly appreciated.

        All the best-

        DoctoRx

  3. aitrader says

    Whether his comments are by design or merely candid, the outcome of diversifying out of two trillion dollars itself will destablize the current global monetary system. I suspect the US is busy cultivating alternatives to China behind the scenes to keep it top dog of the monetary pile. India comes to mind as do the wealthy Western-friendly petro states.

    My read on Chinese goals is that they want to destabilize the dollar and knock the US off as the top global economy. The small chorus of Chinese commentators harping a new reserve currency (which originated with Russia btw), stating goals of protectionism over commodities where China is a single source, their recent buy-up of commodities, and the crash in shipping prices leads me to believe this is a coordinated effort with clear strategies and goals behind it.

    I’ve said for a long time that the Chinese severely underestimate the cohesion of the Europe-America-Canada-Japan-Australia/NZ axis. If I am right about a Chinese plan (oh, I do love a conspiracy :-) ), the strategy moves alone will soon make it obvious. I believe the reaction, likely behind closed doors as well, of the above named countries/regions will surprise us all in its breadth and ferocity.

    ………

    Addendum:

    “After LAC incursions, China now violates Intl Border in Ladakh”

    http://timesofindia.indiatimes.com/news/india/After-LAC-incursions-China-now-violates-Intl-Border-in-Ladakh/articleshow/4978371.cms

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