China's Threat To Dollar Should Ebb Now. By Nicholas Hastings
China poses little risk to the dollar after all.
For months, China and its policy towards diversification of its foreign-exchange reserves have dominated financial news headlines and dollar sentiment.
Like other major holders of the U.S. currency, China is nervous about the threat of a longer-term dollar decline that will devalue its reserves. As a result, the country has made it clear it is looking at other options to spread the risk.
However, data out of Beijing this week should go a long way to allay market fears that China is about to shift policy and hurt the dollar.
First came news that the country's reserves had risen by a global record of $42.1 billion in June alone, taking the total to another global record of $2.13 trillion. This belies any suggestion that Chinese appetite for U.S. assets is on the decline.
On the contrary, figures from the U.S. Treasury on international capital flows confirmed Thursday that much of the heavy overseas demand at U.S. Treasury auctions in the second quarter came from China. The data showed net outflows from U.S. Treasurys totaled $66.6 billion in May, but much of that appeared to be a switch into U.S. corporate bonds.
Perhaps of even greater importance for the dollar were other data Thursday showing that the Chinese economy grew by 7.9% in the second quarter. This was not only up from 6.1% in the first quarter but more than the 7.7% that had been forecast.
However, much of this growth came from heavy government investment in the domestic economy with exports showing little sign of recovery.
And this will be the key to China's currency policy.
The country's sharp growth in currency reserves came from heavy buying of dollars associated with Beijing's policy of keeping the yuan stable at competitive levels.
As the dollar fell earlier this year, the People's Bank of China was compelled to buy the dollar to stop the yuan from rising.
With exports remaining weak, the country is hardly likely to abandon this policy any time soon.
"All the complaints and angst in China about having so much exposure to the dollar should be balanced against their desire to maintain a certain currency value. As long as China ranks stability of the yuan above most other objectives (which is likely), and as long as it runs a large balance of payments surplus (which is certain), China will need to continue to buy dollars (which is inevitable)," is how Stephen Jen, chief currency risk taker at BlueGold Capital Management in London, described Beijing's current position.
Thus, all those claiming that talk of diversifying Chinese reserves out of the dollar and into other major currencies was just hot air have been vindicated and fears that the dollar could come under attack from China any time in the immediate future have proved unfounded.
The bombs at two hotels in Jakarta, worries that CIT Group will go bankrupt later in the day and concern that results from Citigroup and Bank of America won't live up to expectations are all taking their toll on market sentiment Friday in Europe.
Although Google and IBM posted relatively upbeat earnings reports late Thursday, helping to keep global equity markets on the rise, risk appetite on the whole declined.
By 0645 GMT, the dollar had slipped to Y93.68 from Y93.75 late Thursday in New York, according to EBS.
The euro fell to $1.4089 from $1.4145 and to Y132.02 from Y132.63.
For months, China and its policy towards diversification of its foreign-exchange reserves have dominated financial news headlines and dollar sentiment.
Like other major holders of the U.S. currency, China is nervous about the threat of a longer-term dollar decline that will devalue its reserves. As a result, the country has made it clear it is looking at other options to spread the risk.
However, data out of Beijing this week should go a long way to allay market fears that China is about to shift policy and hurt the dollar.
First came news that the country's reserves had risen by a global record of $42.1 billion in June alone, taking the total to another global record of $2.13 trillion. This belies any suggestion that Chinese appetite for U.S. assets is on the decline.
On the contrary, figures from the U.S. Treasury on international capital flows confirmed Thursday that much of the heavy overseas demand at U.S. Treasury auctions in the second quarter came from China. The data showed net outflows from U.S. Treasurys totaled $66.6 billion in May, but much of that appeared to be a switch into U.S. corporate bonds.
Perhaps of even greater importance for the dollar were other data Thursday showing that the Chinese economy grew by 7.9% in the second quarter. This was not only up from 6.1% in the first quarter but more than the 7.7% that had been forecast.
However, much of this growth came from heavy government investment in the domestic economy with exports showing little sign of recovery.
And this will be the key to China's currency policy.
The country's sharp growth in currency reserves came from heavy buying of dollars associated with Beijing's policy of keeping the yuan stable at competitive levels.
As the dollar fell earlier this year, the People's Bank of China was compelled to buy the dollar to stop the yuan from rising.
With exports remaining weak, the country is hardly likely to abandon this policy any time soon.
"All the complaints and angst in China about having so much exposure to the dollar should be balanced against their desire to maintain a certain currency value. As long as China ranks stability of the yuan above most other objectives (which is likely), and as long as it runs a large balance of payments surplus (which is certain), China will need to continue to buy dollars (which is inevitable)," is how Stephen Jen, chief currency risk taker at BlueGold Capital Management in London, described Beijing's current position.
Thus, all those claiming that talk of diversifying Chinese reserves out of the dollar and into other major currencies was just hot air have been vindicated and fears that the dollar could come under attack from China any time in the immediate future have proved unfounded.
The bombs at two hotels in Jakarta, worries that CIT Group will go bankrupt later in the day and concern that results from Citigroup and Bank of America won't live up to expectations are all taking their toll on market sentiment Friday in Europe.
Although Google and IBM posted relatively upbeat earnings reports late Thursday, helping to keep global equity markets on the rise, risk appetite on the whole declined.
By 0645 GMT, the dollar had slipped to Y93.68 from Y93.75 late Thursday in New York, according to EBS.
The euro fell to $1.4089 from $1.4145 and to Y132.02 from Y132.63.
- 17 July |
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