May 26, 2010
According to a Financial Times report, China is reviewing its euro bond holdings in light of the sovereign debt crisis that is plaguing the European continent.
Representatives of China’s State Administration of Foreign Exchange, or Safe, which manages the reserves under the country’s central bank, has been meeting with foreign bankers in Beijing in recent days to discuss the issue.
Safe, which holds an estimated $630bn of euro zone bonds in its reserves, has expressed concern about its exposure to the five so-called peripheral eurozone markets of Greece, Ireland, Italy, Portugal and Spain.
This news, which hasn’t been confirmed, sent shockwaves throughout the markets on Wednesday since this may signal a change in policy as China has been attempting to diversify away from U.S. government debt. The Euro plunged and approached recent lows after the release. The Euro closed U.S. trading at 1.2178, a decline of 1.4 percent on the day.
A spokesman for Safe refused to comment. An estimated 70 per cent of China’s reserves are held in US dollar securities, but the composition and management of the funds controlled by Safe are regarded as state secrets.
However, analysts point out that Safe rarely cuts its existing holdings significantly as it has so much new money to invest every month.
Instead, it reduces the proportion of new investment it devotes to a particular asset, thereby reducing the weighting of that asset in its overall portfolio.
According to the latest figures announced by Safe, the country’s foreign exchange reserves totalled $2,447bn at the end of March, up $174bn in just six months.
It remains to be seen what the next steps will be for China assuming the report is legit. In the meantime, this fresh bit of news, true or not, does not bode well for the ailing currency and restore market confidence that the EU so desparately needs. Furthermore, escalating concerns of contagion and its effect on the banking system could add more volatility to U.S. markets as well as those around the globe.
Read the Full Article by the Financial Times
Posted by Rom on 