With foreign reserves of more than $2.8 trillion, many market watchers are concerned that China could undermine the U.S. economy by selling off that reserve. What many don’t realize is that China has already converted a large part of that reserve to other currencies.
Long-concerned about the long-term prospects of the U.S. dollar, China has diversified its holdings and about a quarter of the total is in euros. That amounts to about $700 billion worth of euros.
Debt problems in Europe have actually allowed China to put some of those euros to work. The European Central Bank has estimated that the worst-case scenario will require a 1.5 trillion euro infusion of cash into the system. This is about $2 trillion at current exchange rates.
China has been a cash machine for years, and increases its foreign reserves by approximately $1 billion a day. At that rate, it could effectively fund a slow bailout of Europe without a disruption to the financial markets.
Even a dramatic crash, like the world saw in 2008, could be mitigated with China’s reserves. The likelihood of such a crash originating in Europe has been greatly reduced by the willingness of China to buy European debt.
This may not be a long-term solution to the debt problems plaguing the eurozone, but it seems to offer some breathing room while politicians struggle to find the long-term answers.
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