In These New Times

Note that 5% of Chinas currency reserves are held in pounds sterling, presumably received in payment for imports to Britain and reinvested in UK government bonds. The pound, like the dollar, acts as a reserve currency, a privilege as crucial to British prosperity as it is incompatible with quantitative easing i.e. money printing to fund UK debt. On the other hand, the programme of cuts which will hasten the collapse of Britian’s consumer economy, and hence of imports from China, will undermine the source of debt funding which that 5% represents. What a wonderful free ride we’ve had purchasing imports with pounds and seeing them reinvested on our government bonds and what a lamentable state we’ll be in as it comes to an end!

Telegraph

5th September, 2010

Roughly 65pc of China’s foreign currency reserves are held in dollars, according to a report. Photo: AFP The Chinese Government holds the largest stockpile of currency reserves at $2.45 trillion (£1.59 trillion), with 65pc held in dollars, 26pc in euros, 5pc in pounds, and 3pc in yen.

The report was published in official newspaper the China Securities Journal and confirmed analysts’ estimates that about two-thirds of the reserves are invested in dollars. Until now the allocation of China’s foreign exchange reserves was considered a state secret.

China may seek to diversify reserves, World Bank President Robert Zoellick saysSeparately Hu Xiaolian, a vice governor with the People’s Bank of China, warned that depreciation was a risk for the foreign exchange reserves held by developing countries.

“Once a reserve currency’s value becomes unstable, there will be quite large depreciation risks for assets,” she wrote in an article that appeared in the latest issue of China Finance, a central bank magazine.

“The outbreak and spread of the global financial crisis has highlighted the inherent deficiencies and systemic risks in the current international currency system,” she said.

“A diversified international currency system will be more conducive to international economic and financial stability,” she added, calling for greater cross-border use of the yuan.

China has signalled a shift away from dollar assets in recent months, in a bid to diversify. It has sharply increased its net purchases of Japanese debt, and has raised its holdings of South Korean bonds.

The latest data also shows it has moderately reduced its holdings of US Treasuries, to $843.7bn in June from $894.8bn at the beginning of the year.

China however remains the biggest single holder of US Government bonds, and the China Securities Journal suggested that further significant diversification away from dollar assets in the short-term was unlikely.

“It is unlikely that China will increase purchases of Japanese bonds in the coming months because the yen might weaken at any time,” it said.

“China is very likely to increase purchases of US Treasuries in September. The possibility for China to buy more Korean bonds can’t be ruled out.”

Analysts have also said the diversification represents investor desires to take advantage of the best opportunities.