Trades reveal China shift from dollar

China began diversifying away from the US dollar in earnest in the first four months of this year, most likely by buying far more European government debt than US dollar assets, according to estimates from Standard Chartered Bank.

China’s foreign exchange reserves expanded by around $200bn in the first four months of the year, with three-quarters of the new inflow invested abroad in non-US dollar assets, the bank estimated.

“It certainly appears that China’s finally following through on its policy to diversify its foreign reserve holdings away from the US dollar,” said Stephen Green, the bank’s chief China economist.

For over six years, Beijing has continued to accumulate US government debt even as officials insisted they wanted to reduce the weighting of US dollar assets in reserves, which exceed US$3,000bn. Between December 2007 and March this year, China’s foreign exchange reserves doubled to $3,044bn and over that time most analysts believe the proportion of US dollar assets remained relatively steady at between 60 and 70 per cent of the total.

Beijing, however, routes purchases through custodian banks and overseas financial centres, such as London and Hong Kong, to disguise its offshore dealings.

Standard Chartered compared China’s inflow of new foreign exchange reserves to net purchases of US government debt by buyers in China, Hong Kong and London. These purchases fell dramatically in the first four months of this year to $46bn – equivalent to just 24 per cent of the $196bn in foreign exchange that China accumulated over the same period.

Mr Green said it was possible that China had found a way to disguise its purchases of US government debt – or could be buying riskier US assets that don’t show up in monthly data.

In recent months, Chinese leaders have repeatedly pledged to aid European countries struggling with sovereign debt crises.

“Even if Beijing were not concerned about the US fiscal situation and/or the US dollar, the yields on offer in the euro market would likely be attractive enough for it to diversify into Europe at the margin,” Mr Green said.

There is no sign China is reducing its existing holdings of US dollar assets, remaining the largest foreign owner of US securities, with $1,152bn by April 2011, according to the US Treasury.

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