EconoChina

A blog on Chinese economy & society

China ups JGB holdings, sees no gold standard

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The FT mainly attributes this to jitters about Europe:

Chinese investors bought up a net Y541bn ($6.2bn) in Japanese government bonds in the first four months of the year, amid ongoing global concerns about Europe’s debt woes.

Analysts said the scale of the buying – which was more than double the full-year record total of Y253.8bn set in 2005 – was notable when compared to the rate of increase in China’s foreign exchange reserves in the first quarter.

Yes, this is possible, but I was surprised that it did not connect the dot at all with China’s recent change in currency regime. Switching to a dirty peg of a basket of currencies, requires, well, more diversified currency holdings, like for example…Yen. The WSJ  pointed out this possible angle of interpretation, but rightly noted that:

“They still haven’t bought much in the longer-end, with a comparatively small level of purchases of maturities greater than two years, so whether they expand their buying beyond of the short-end will be crucial,” Mr. Inadome said.

Since 96% of the new JGB purchase was those maturing in less than 2 years, this is not alarming per se. But given the recent change in currency regime, this is an area that is worth paying more attention. Most people are too sanguine in assuming that China has nowhere else to go but the UST, due to the depth and liquidity of the market. Well, while the market depth of UST may remains so, it surely is not liquid for the Chinese, given the size of their portfolio. And they don’t have to actively sell down existing UST holdings to change its reserve mix and alarm the market in the process. Due to its massive trade surplus , China has new money to invest in any number of securities every month, and plowing some of these cash in other basket constituent currencies makes perfect sense.

Separately, in an article published on its website, the SAFE (that’s the folks in charge of China’s reserves) punctuated the hopes of gold bugs by explicitly ruling out gold as a major component of Chinese reserves, on  concerns of market depth and wild swings in prices. This is hardly surprising given the earlier call for adopting SDR as the new reserve currency by Zhou Xiaochuan, the governor of the PBoC.

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Written by Cindy Luk

July 7, 2010 at 7:21 am

Posted in China, Investment

Tagged with , , , ,

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