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China's currency reserves pass $1 trillion and likely to double to $2 trillion by 2010

Economics / Strategic News Nov 08, 2006 - 04:37 PM GMT

By: Nadeem_Walayat

Economics

China's currency reserves pass a record $1 trillion, and continue to grow at a rate of $20 billions per month. China's reserves have grown from 100billion in 1996 to $1 trillions today and are expected to double to $2 trillions by 2010. Now China accounts for almost 20% of the world's foreign exchange reserves, Japan being second with some $900 billions of reserves, also mostly in US dollars.

The reason for the growth in reserves is primarily due to the under valuation of the Yuan which in turn is contributing to the large trade deficit that the US is running.

China's currency reserves pass $1 trillion and likely to double to $2 trillion by 2010


China sees the $1 trillion reserve as insurance against economic turbulence. Since the Asian financial crisis of 1997 and 1998, many asian countries have stacked up large pools of reserves, to cushion themselves against future shocks.

The consequences of these reserves is seen in U.S. government bond market, where the price of the bonds has stayed high and -- because bond prices and yields are inversely low resulting in low US interest rates, (approx 70% of china's reserves are in US Bonds)! Any decision to diversify into non U.S. holdings could have disastrous consequences for the U.S. economy as it would result in a dramatic fall in he US dollar.

Foreign governments have charged that China has kept the value of the yuan artificially low, which has made the price of its exports cheaper in other countries. With the trade deficit running at some $18 billions per month with China.

China is starting to aggressively use its cash stock pile to buy into resources around the world, specifically Africa where trade has grown to $40 billion. Chinese investment being poured into copper mines and oil fields, helping to boost African economies. The buying is not limited to resources, China is also buying hi technology imports such as the recent deal to buy 150 airbus A320's.


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