Chinese reserves subterfuge

The composition of Chinese reserves is a state secret, so it was of considerable interest when China released its $2.45 trillion reserve composition last week. The official China Securities Journal “revealed” the composition as follows:
1. 65% US dollars
2. 26% euros
3. 5% pounds
4. 3% yen

China imports from the following countries for 2009:

1. United States $298 billions
2. Japan $229
3. Hong Kong $175
4. South Korea $157
5. Taiwan $106
6. Germany $106

Chinese reported statistics are often false, and it is reasonable to assume that the dollar holdings are overstated. (If the numbers were accurate, why would they release them?) The point China is trying to make is probably that their dollar reserves are consistent with recent years as a percentage of the total and that therefore nothing has changed. But it is widely known that China has accelerated its buying of Japanese yen and Korean bonds. It is also a buyer of gold. The Chinese are no doubt trying to support the dollar as they exit their positions.

A vice governor of the People’s Bank of China separately expressed concern about the depreciation of the country’s reserve currencies and its concentration in dollars. It has also been reported that China has been absent from recent treasury auctions, with the Fed assuming the role of biggest buyer. It looks like China is bringing its reserves more in line with its imports. This risk to the dollar is that China will cease to offset its US exports with purchases of US bonds. (source: Report in Reuters printed in The Business Times of Singapore, September 4-5, 2010)