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Is investing in forex cost effective?

By Tian Junrong (People's Daily)

16:39, October 18, 2011

Edited and Translated by People's Daily Online

Holding the U.S. treasury securities is not the best option, but it is nevertheless a practical option in the current situation. China should in a timely fashion and stably promote the diversification of its foreign exchange reserves.

According to a report by the U.S. Department of the Treasury, China is the largest holder of U.S. Treasury securities. Given that the U.S. debt rating has been downgraded and the U.S. dollar is depreciating, are China's foreign exchange reserves facing a huge risk?

It is an action of investment that China uses its foreign exchange reserves to buy the U.S. Treasury securities and China could adjust the investment according to the market situation. Insiders believe that holding the U.S. Treasury securities is not the best option but a practical option in the current situation in a sense.

On the one hand, the international financial crisis did not shake the U.S. dollar's dominant position in the international monetary system, and it is still impossible to find a replacement of the U.S. dollar in quite a long period. In fact, the U.S. Treasury security is still a government bond with the largest scale and best quality, mobility and credit.

"The more turbulent the situation is, the safer the U.S. assets are. Recently, as the European debt crisis is becoming more severe, the U.S. Treasury securities are also becoming hotter targets of the hedge funds. Its rate of return keeps setting new low records, indicating that it has a lot of buyers in the world," said Ding Zhijie.

On the other hand, the other kinds of government bonds are too small in the scale or are not popular in local places. "In the euro zone, the best government bond is the German government bond, but its scale accounts for only 20 percent of that of the U.S. Treasury securities. In addition, the German people's rate of saving is quite high, and German government bonds are bought mostly by the German people and are not left much for the external capital. Regarding the Japanese government bond, Japanese people's rate of saving is even higher and the Japanese government bonds cannot absorb much external capital too. In addition, the Japanese government's debt is three times larger than its GDP," said Zhao Qingming.

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