Forex Blog: Currency Trading News & Analysis.

July 26th 2006

China is urged to diversify reserves

China’s foreign exchange reserves are currently the largest in the world; analysts are predicting they may soon surpass one trillion dollars. The majority of the reserves have long been parked in USD-denominated assets, mostly Treasury securities. Because the RMB is slowly appreciating against the USD, when China converts these securities back into Yuan, it will incur massive losses. Further, the longer it waits-assuming the Yuan continues to appreciate in value-the larger China’s losses will be. For this reason, China’s National Bureau of Statistics is recommending for it to begin transferring some of its holdings into assets denominated in other currencies and mitigate its foreign exchange risk. Since China’s reserves are so large, any move away from the USD would have significant fallout in forex markets.

The National Bureau of Statistics warned against the exchange risk associated with tying too much money up in assets denominated in a single currency which threatens to steadily decrease the value of the reserves

Read More: China urged to switch out of dollars

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Posted by Adam Kritzer | in Chinese Yuan (RMB), US Dollar | No Comments »

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