China reportedly is ready to shed risky dollar-denominated assets from its reserves, holding on to only instruments guaranteed by U.S. government.
A Communist Party directive leaked to the Chinese-language edition of the Asia Times said dollar reserves should be limited to U.S. Treasuries or agency mortgage debt such as Freddie Mac that has Washington's backing.
Analysts say the move signals Beijing's worries that trouble is brewing.
“The message from Beijing is that we don't like this environment,” says Hans Redeker, currency chief at BNP Paribas.
“When the world's biggest investor turns risk-averse, that is something you take notice of. We think this could become the new theme for the markets in the medium-term.”
The move covers both the State Administration of Foreign Exchange (SAFE) and China's state-controlled commercial banks, when combined manage an estimated $3 trillion in foreign holdings, The Telegraph reported.
The exact break-down of China's holdings are a state secret but it is believed that SAFE bought large amounts of corporate debt as well as municipal and state bonds during the boom years of 2006 and 2007.
While China has expressed concern over the dollar's weakness amid low interest rates, U.S. Federal Reserve officials have said China could put such fears aside by strengthening its currency.
“As both Hong Kong and the mainland are currently pegging to the dollar, they are both to some extent stuck with the policy the Federal Reserve has chosen to promote recovery,” says San Francisco Fed President Janet Yellen, according to Reuters.
“Most analysts with whom we met recognized that the renminbi will need to be revalued and monetary policy tightened to avoid inflation.”
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