China says it won't dump treasuries or pile into gold

Section:

Now why would anyone ever suspect such an option?

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China Won't Dump Treasuries or Pile into Gold

By Zhou Xin and Alan Wheatley
Reuters
Wednesday, July 7, 2010

http://www.reuters.com/article/idUSTOE66604R20100707

BEIJING -- China on Wednesday ruled out the "nuclear" option of dumping its vast holdings of U.S. Treasury securities but called on Washington to be a responsible guardian of the dollar.

In the third in a series of statements explaining its work to the Chinese public, the State Administration of Foreign Exchange sought to allay concerns in the outside world that arise whenever Beijing shifts its holdings of U.S. government debt.

"Any increase or decrease in our holdings of U.S. Treasuries is a normal investment operation," SAFE, the arm of the central bank that manages China's official currency reserves, said.

... Dispatch continues below ...



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It said it constantly adjusts its portfolio to maximimise returns, and any changes to its U.S. Treasury portfolio should be seen in that light and not interpreted politically.

In a series of questions and answers posted on its website, www.safe.gov.cn, SAFE asked rhetorically whether China would use its $2.45 trillion stockpile of reserves, the world's largest, as a "nuclear weapon".

SAFE said such concerns were completely unwarranted.

"The U.S. Treasury market is the world's largest government bond market, and U.S Treasury bonds deliver fair good security, liquidity and market depth with low transaction costs.

"The U.S. Treasury market is a very important market for China," the agency said.

China held $900.2 billion in U.S. Treasuries at the end of April, according to U.S. Treasury data released on June 15.

Bankers say China's total holdings of dollar-denominated assets are much greater, accounting for perhaps two-thirds of its reserves.

SAFE also gave a qualified vote of confidence to the dollar.

The agency acknowledged that financial markets were very concerned at one point that massive U.S. government borrowing would drive the U.S. currency lower.

But it said economic conditions elsewhere were also a factor in determining the dollar's trend. The euro zone, for instance, was struggling with high government debt levels.

"We must recognise that any depreciation of the dollar is relative to other countries, and other countries or regions also have this or that problem," SAFE said.

One of the prime concerns of Chinese Internet commentators is that a long-term decline in the dollar or euro will erode the value of SAFE's portfolio.

To that end, SAFE called on the United States and other major countries to take "responsible measures" to maintain the value of their currencies. This meant withdrawing monetary stimulus in a reasonable manner and relying less on deficit spending.

SAFE was lukewarm about gold as an investment.

"It cannot become a main channel for investing our foreign exchange reserves," the agency said, noting the size of the gold market was limited and prices were volatile.

Buying more gold would also not help much in diversifying China's reserves.

China has increased its gold holdings by more than 400 tonnes in the past few years to 1,054 tonnes. Even if it doubled that amount gold's share of SAFE's portfolio would increase by only one or two percentage points.

SAFE is an easy target for domestic critics who question why China has amassed a mountain of reserves instead of investing more at home. The elucidations on its website appear primarily aimed at disarming those critics.

"SAFE will never be a speculator. It mainly seeks to protect the safety of China's FX reserves and ensure a stable investment return," it said.

The agency said it was a financial investor and did not seek management control when it made equity investments.

Answering its own question on whether it has bought into stocks, private equity funds or any other higher-risk instruments, SAFE said its never excludes any investment.

"It depends on whether a product meets SAFE's demand for safety, liquidity and a stable yield for its FX reserves, and whether it can help SAFE diversify risks," the agency said.

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China Spells Out Gold Reserve Policy

From Reuters
Wednesday, July 7, 2010

http://www.reuters.com/article/idAFTOE66606Z20100707?rpc=44

BEIJING -- Following is a translation of a statement on gold reserves by China's State Administration of Foreign Exchange on Wednesday.

Q: Is China planning to further increase its gold reserves? When?

A: Gold is globally recognised, is a store of value and can be used for urgent payment. However, there are some limits to investing in gold and it cannot become a main channel for investing our foreign exchange reserves.

First, the size of the gold market is limited. Annual global gold output is about 2,400 tonnes and there is a basic balance between its supply and demand now. If we buy a large amount of gold, it will surely push up the global gold price. China's gold price basically matches the global level, so when Chinese people go to buy gold jewellery in shopping centres, they face surging prices. That will eventually hurt the interest of Chinese consumers.

Second, the gold price is very volatile. The global gold price is much affected by currency rates, geopolitical changes, supply-demand relations and speculation. It often fluctuates. In addition, gold investment does not generate interest returns, but investors have to bear warehouse, transportation and insurance costs. Looking back at its performance over the past 30 years, the risk-return balance of gold is not very good. Gold can help counter inflation, but quite a few other assets can too.

Finally, increasing the gold reserve will not help much in diversifying China's foreign exchange reserves. In the past few years, we increased the gold reserve by more than 400 tonnes. Our country's gold reserve has already reached 1,054 tonnes. Even if we double the amount, it can only diversify between $30 billion to $40 billion of the foreign exchange reserves, and the proportion of gold reserve in our foreign exchange reserve will only increase by one or two percentage points.

In conclusion, we will take careful consideration of our demand and the market situation when reducing or increasing our gold reserves.

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