Will China really move out of US assets?
Not to long ago, China indicated that it was ready to go on a shopping spree for European investments. This represents an interest in diversifying out of US assets. And this is not terribly surprising: 2/3 of China’s reserves are in dollar denominations. That leaves China over-exposed in terms of asset allocation.
But China isn’t just planning to diversify into other currencies and other countries’ debts: China also wants something more…substantial. China is planning to move into oil investments. At any rate, that’s what Chinese leaders say.
It could be just posturing. But China would be wise to diversify its investments. Such a move could be harmful to the US dollar in forex trading, though. The Forex Blog explains what could happen if China does abandon its large amounts of US notes:
This may just be jawboning to try to slow down the US printing presses, but if it is more than that, it could have a significant effect on the perceived value of the US Dollar, especially in light of the current $1.75 trillion US deficit – a full 12.3% of the projected 2009 GDP. If foreigners lose confidence in the US Dollar, inflation and interest rates will certainly move sharply off their historic lows as the risk of “risk free” US treasuries is revealed and repriced.
No wonder Secretary of State Hillary Clinton was so conciliatory when she visited Asia. It looks as though the US may need China a little more than China needs the US.
See Also
- US Dollar in Forex Trading
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