BEIJING –- The government of China is dealing with an unusual problem: what to do with the $1.07 trillion in foreign currencies and securities in the country’s central bank.
China is one of the biggest investors in the world. But with its reserves increasing by nearly $20 billion a month for the last couple of years, officials have agreed that the traditional approach to managing this massive fund is out of date, stated The Wall Street Journal.
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China has joined the ranks countries like Singapore, South Korea and Norway that have begun to look at new ways of managing its investments.
Together, wrote The Journal, "These moves by central banks have ramifications for financial markets world-wide. The likely result is fewer steady purchases of investments like U.S. Treasury bonds and more buying of investments that are riskier but have better long-term returns, like corporate bonds, stocks or even real estate and commodities.”
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The newspaper went on to opine that, "Even a slight shift of this type could have a significant impact in U.S. markets. China has long been one of the biggest buyers of Treasury notes, making it in effect a major lender to the U.S. government. China’s buying has helped keep interest rates low in the U.S.: The greater the demand for a country’s bonds, the lower the interest rates the country needs to offer.”
Any move by China to broaden its investments would mean buying less U.S. debt. That, said the newspaper, has led some in the U.S. to worry that less demand for dollar-denominated investments will put downward pressure on the U.S. currency.
One expert though said China is likely to continue to manage a large portion of its reserves the traditional, conservative way.
If current trends continue, China’s reserves could top an estimated $2 trillion by the end of the decade. The country will have to make some hard decision on how it manages its holdings.
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