China stews as it tries to reduce reliance on U.S. dollar


US Debt Standoff Provokes Ire Among China's Officials

By Simon Rabinovitch
Financial Times, London
Friday, October 11, 2013

SHANGHAI -- Washington's debt brinkmanship has provoked deep anger in Beijing and bolstered its resolve to lessen the world's reliance on the dollar, according to current and former Chinese government advisers.

Political leaders in the US have intensified talks about their fiscal standoff, fuelling hopes that Washington will raise its debt ceiling before next week's deadline.

However, the prospect of last-minute negotiations will test already-frayed nerves in China, the biggest foreign holder of US government debt.

... Dispatch continues below ...


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"You can't hijack the global economy through political struggles. It's not responsible," says Yu Yongding, a member of the Chinese Academy of Social Sciences, a leading government think-tank.

"We are angry but are not panicked. The consequences are bad for the reputation of the US because the credibility of debt is so important," says Mr Yu, who is also a former adviser to the central bank's monetary policy committee.

In public, Chinese officials have been restrained in their comments about the US debt debate. Li Keqiang, China's premier, has said Beijing is paying "great attention" to the issue.

Opinions expressed in private have been more blunt. "They are pretty peeved. That is the short answer," says an adviser to the central bank, speaking on condition of anonymity.

In the short term, Mr Yu and other top Chinese academics say, Beijing's hands are tied. With $1.3 trillion invested in US Treasuries, any sudden move to sell those holdings would by itself shake global markets and undermine the value of China's remaining US assets -- the very outcomes that the country's currency reserve managers want to avoid.

"Just thinking about the size of the portfolio, it's very hard to do," says Zhu Ning, deputy director of the Shanghai Advanced Institute of Finance. "They want to do it slowly, to not stir up the frontrunners in the market."

Over a longer period, this slow approach appears to have allowed China to make strides in diversifying away from the dollar.

An analysis of US Treasury data indicates that the portion of dollar assets in China’s foreign exchange reserves fell to 49 per cent as of the end of June 2012 -- the most recent available figures -- down from 69 per cent three years before.

"We need to continue to diversify. Even without this latest debt debate, it would still be necessary to diversify," says Zhu Baoliang, an economist in the State Information Center, a research unit of the National Development and Reform Commission, a powerful planning agency.

Although China has reduced the portion of its foreign exchange reserves invested in dollar assets, it has put more of those dollar assets into US government bonds since the global financial crisis. US Treasuries accounted for about 62 per cent of China's official dollar holdings in 2009 but 72 per cent last year, according to an analysis of US data.

"We started investing more in US government debt because it seemed so safe and less in agency bonds (especially government-sponsored mortgage finance companies Fannie Mae and Freddie Mac). Now we should look at options outside US government debt," says Tang Jie, a researcher at Renmin University.

Beyond shifting its investment portfolio away from the US, China's other priority is to lessen the dollar's influence in global finance, an objective that it has pursued since early 2009 when it launched its strategy to internationalise the renminbi.

Watching the world's biggest economy use the threat of a debt default as a bargaining chip in domestic politics will reinforce that strategy, Mr Yu says. "It's a good lesson that the global economy should cut its reliance on the US dollar and we should not forget the importance of reforming the international monetary system."

Without a fully open capital account, internationalisation of the renminbi will be difficult to achieve, but Beijing still has managed steady progress so far. The renminbi's share of global currency trading volumes has jumped from 0.9 per cent in 2010 to 2.2 per cent in 2013, according to Swift, the global payments company.

As the storm clouds gathered over Washington on Thursday, Beijing made another small move to increase international use of the renminbi, signing a swap agreement with the European Central Bank.

The timing may only have been coincidental, but the significance was clear: It was one more step in China's long journey to cut its exposure to the dollar.

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