Magazine article Global Finance

FX Update

Magazine article Global Finance

FX Update

Article excerpt

China, Gold and the ZAR

Since April of this year there have been signs of a growing level of dissatisfaction within official Chinese circles about the nation's exposure (via its $ 1 Trn of FX reserves) to an overvalued US dollar (which PBOC MPC member Fan Gang recently put down to "a US Treasury that is printing too much money.") Given that around 70% of its reserves are still invested in US dollardenominated assets, it is easy enough to understand why they are concerned.

Evidently Chinese officials are not the only ones thinking about this issue as a recent comment from San Francisco Federal Reserve president Janet Yellen made clear. In response to a question from the audience following a lecture at the University of California, she noted: "There is a mutuality of interests [between the United States and other countries that hold large amounts of USD assets.] But it doesn't mean it couldn't change. It could be the case where other countries channel less of it into USD assets and eventually have an impact at some stage that we might have to address."

With a number of China's leading government think tanks having already recommended using some of their FX reserves "to buy other assets such as gold and strategic resources such as oil," as the only practical way out of the current situation, we suspect that it is only a matter of time before the nation starts to follow just such a policy. Indeed, by early November financial markets were becoming increasingly alert for any signs that a shift away from the USD could be taking place. It is therefore worth asking quite what the implications of such a move would be for the currency markets. …

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