The Debts of the Lenders: China Stuck in Dollar Trap

Despite recent protestations from the fx market, the dollar remains the world's reserve currency b/c of purchasing decisions made in Beijing. Indeed, Chinese officials have PUBLICLY acknowledged that they are stuck in a "dollar trap" where they are forced to continue buying more just to keep up the value of their older purchases.

But instead of just looking at the dollar, consider what China's SAFE (State Administration of Foreign Exchange) outlook for other currencies are for the foreseeable future: bullish Aussie, VERY bearish gilts, and neutral Euro. It's no surprise that these 3 major currencies are occupying the Politburo's attention - Australia is a key provider of industrial metals like copper and iron ore, the Eurozone is fast growing into a secondary export market after the US, while the UK retains some prominence in the financial markets b/c of London's legacy pull.

China’s official foreign exchange manager is still buying record amounts of US government bonds, in spite of Beijing’s increasingly vocal fear of a dollar collapse, according to officials and analysts.

Senior Chinese officials, including Wen Jiabao, the premier, have repeatedly signalled concern that US policies could lead to a collapse in the dollar and global inflation.

But Chinese and western officials in Beijing said China was caught in a “dollar trap” and has little choice but to keep pouring the bulk of its growing reserves into the US Treasury, which remains the only market big enough and liquid enough to support its huge purchases.

http://www.ft.com/cms/s/0/
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