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People's Daily Online>>China Business

Time for China to dump U.S. debt? (2)


10:17, October 20, 2011


Despite being a regular market move, the record drop of China's holdings of U.S. Treasuries may still add to market woes, as it revealed market concerns over the "dollar trap," economists noted.

"China has run a current account surplus and a capital account surplus uninterruptedly for more than two decades. Inevitably this has led to an accumulation of foreign reserves," Yu Yongding, an economist with the CASS, wrote in an article published recently.

He declared that China was caught in a "dollar trap" as it had to amass the dollar-denominated assets, despite the fact that risk of a depreciating dollar kept rising.

When China decided to slash a sizable amount of U.S. Treasuries in June 2009, the greenback had been losing value for months. The reading of U.S. dollar Index, a gauge of the dollar performance against a basket of currencies, tumbled to 75 points at the end of 2009 from 85 in the first few months of the year. The weak dollar eroded the value of dollar-denominated assets of many investors.

Loaded with an excess of dollars, the world's largest exporter is facing a quandary: on the one hand, a weaker dollar could mean a big capital loss for China. On the other hand, the dollar is still deemed as a flight-to-safety compared with other investments. Thus the country seems stuck in the "dollar trap."

"There is no clear evident that we are reducing our holdings of the U.S. Treasuries systemically and unremittingly," said Zhang. "But whenever the dollar is depreciating, our foreign assets, with such a large portion being dollar-denominated, can hardly stay immune from the loss."


Economists agree that as the United States' largest foreign creditor, China should contemplate ways to pull itself out of the "dollar trap," as the U.S. economy is faltering with its debt piling up and its currency on the brink to depreciate.

China must make fuller use of the non-financial assets in its foreign reserves, as well as speed up the diversification of investing channels to resist a possible long-term weakening of the dollar, said Xia Bing, director of the Finance Research Institutes of the Development Research Center under the State Council.

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canuk at 2011-12-05174.119.100.*
yes but...
Observer at 2011-10-26222.127.174.*
You speak of dealings with mutual respect yet you speak of your partner with the strongest ties of any partner as if they are piranhas. Sometimes the short term solutions are not the right ones. You must listen to those who have vision backwards and not so much to those who can only see forward. Do not look into the eyes of the accountant as they are not trained as those of the creative mind. Understanding the needs of your partner is the answer to mutual respect and fruitful cooperation.

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