Last week, officials from China’s Central Bank announced that they would “actively explore more effective ways to utilize [forex] reserve assets.” Many analysts interpreted this remark as an explicit signal that China would begin ‘diversifying’ its foreign exchange reserves, by holding fewer USD and more of other currencies. However, as the speculation began to reach fever pitch, the same group of officials announced that their previous statement had been misinterpreted. In fact, existing USD reserves play a vital role in helping China maintain its peg to the USD. Accordingly, any ‘diversification’ will only affect new reserves. The Daily Times reports:

“The general trend is that every country wants to diversify its reserves. No one is willing to put all of their eggs in one basket and it is impossible for China to put all its forex reserves, which exceed $800 billion, in one currency.”

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