China: forex reserve diversification is difficult

Last week, I wrote a commentary piece on the implications of the burgeoning global stock of forex reserves, the most pressing of which is the risk that the USD will plummet when/if countries decide to diversify their reserves into other currencies. Perhaps in response to my posting, an advisor to China’s Central Bank commented today that diversification would be a difficult task. He identified the Japanese Yen and the Euro as viable alternatives, but insisted that because the US was China’s primary trade partner, it makes sense for China to hold its reserves in USD-denominated assets. If the USD falls, as many expect it will, China will compensate by allowing the Yuan to depreciate proportionately. Forbes reports:

“If there's a hard landing in the US and the dollar plunges, and we maintain a managed floating system, the yuan will fall along with the US dollar.”

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