China Diversifying Away From The Dollar

The Wall Street Journal highlights new U.S. Treasury data which indicates that China has reduced its U.S. dollar holdings as it begins to diversify its $3.2 billion stockpile of foreign currency reserves:

“It clearly indicates China’s intention not to put all its eggs in one basket,” said Lu Feng, director of Peking University’s China Macroeconomic Research Center.

China still remains a strong buyer of U.S. debt. China’s holdings of U.S. securities rose 7% to $1.73 trillion as of June 30, an increase of $115 billion from 12 months earlier, Treasury data show.

But the percentage of dollar holdings in China’s foreign-exchange reserves fell to a decade low of 54% in the year that ended June 30, from 65% in 2010. The Treasury data provided the most comprehensive read on China’s holdings of U.S. securities available.

China’s foreign currency reserves may have just seen their first quarterly decline since 1998, due to a narrowing trade surplus and an outflow of speculative capital, but the reduction in its dollar holdings may also reflect a recent pledge to invest in Europe’s bailout funds and increase its holdings of euro assets.

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