The unthinkable has happened: China’s foreign exchange reserves have surpassed the historic level of $1 Trillion. Since the late 1990s, when China was continuously inundated with foreign direct investment, it has been forced to remove the foreign currency from circulation in order to mitigate the risk of inflation. Now, China has found itself in the unenviable position of managing the world’s largest cash reserves. As everyone knows by now, most of these reserves are held in USD-denominated assets, a phenomenon that has heretofore provided support for the USD while thoroughly muddling US bond markets. Imagine the effect on US capital markets if China decreased its USD holdings and invested the proceeds in its own economy. The Gulf News reports:

The composition of China’s reserves is secret, but economists believe about 70 per cent is in US Treasury bills, much of the rest in euros and a small amount in yen. Purchases of assets in other currencies are believed to be growing as the bank diversifies its holdings.

Read More: China in dilemma over forex reserves