China needs to adjust policies that lead to more forex reserves
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Xinhua, October 24, 2011
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 US Treasuries in June 2009, the greenback had been losing value for months. The reading of the US dollar Index, a gauge of the dollar's 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.
Fatal dependence
Loaded with excess 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 evidence that we are reducing our holdings of the US 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 US economy is faltering, with its debt piling up and its currency on the brink of depreciation.
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.
Zheng Xinli, permanent vice chairman of China Center for International Economic Exchanges, has suggested that Chinese companies boost overseas investment as a way to absorb trade surpluses and fend off the dollar risk.
The dependency on the US Treasuries partly revealed the country's inability to invest effectively overseas, Zheng said.
He said that Germany and Japan did not have to buy a large amount of foreign bonds when they were running huge trade surpluses because of their strong capacity to invest overseas.
China must adjust or even annul those macro-economic policies that result in further accumulation of foreign exchange reserves.
