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China’s dollar Achilles heel

China’s dollar Achilles heel

by David Marsh

Mon 24 Jan 2011

‘The current international currency system,’ President Hu Jintao said portentously last week, ‘is the product of the past.’ The statement made headlines around the world. However, as always, it was difficult to discern exactly what Hu was driving at.

China wants to modify the present currency arrangements under which the dollar is still by far the dominant international money. But Beijing remains remarkably vague about what it wishes to put in its place.

In the last couple of years, China has enacted a series of steps for enhancing the renminbi’s global role.

China’s Achilles heel is this: if the world monetary system is outdated, then shouldn’t the People’s Bank be lowering the volume of reserves held in dollars?

China remains officially tight-lipped about the proportion held in the greenback. China's foreign exchange reserves rose to a record $2.85 tn by the end of last year, an 18.7% increase year-onyear, according to the People's Bank. Yi Gang, vice-governor, has admitted that the reserves increase ‘will be increasingly challenging China's asset management.’

Officially, the proportion of reserves held in dollar is a state secret. However, there seems to be increasing awareness that this opacity doesn’t make much sense. We know (courtesy of Reuters) that China Securities Journal, an official newspaper, citing unnamed reserve managers, said a few months ago the reserves composition is in line with ‘the global average’: 65% in dollars, 26%
in euros, 5% in pounds and 3% in yen.

China could make a further step by communicating the currency reserve breakdown to the International Monetary Fund. The IMF’s latest release, at the end of December, states that overall world foreign exchange reserves at the end of September 2010 totalled $8,986 bn against $8,421 bn at the end of the second quarter and $7,880 bn a year earlier.

However the ‘allocated reserves’ – basically the reserves for which member countries give the IMF a currency breakdown, a list which excludes China and some other mainly developing countries – were ‘only’ $4,999 bn – leaving a $4,000 bn ‘black hole’ of unallocated reserves. Of the ‘allocated reserves’, 61% are in dollars and 27% are in euro. China would do everyone a service if it started communicating its holdings to the IMF, so that the aggregate figures became more meaningful. If we are to regard the world’s largest reserve holder as serious about revamping the future of international money, then it should at least give us a bit more information about the status quo.

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