China may be clearing some of their USD FX reserves

Reports that China may step up the diversification of its huge foreign exchange reserves is not great news for U.S. Treasurys, already under pressure from talk about an easing in the Federal Reserve’s bond-buying program. But, the fall-out from such a move is likely to be limited, analysts say.

The body that manages China’s currency reserves has set up an operation in New York to invest in private equity, real estate and other assets as it steps up its diversification away from U.S. government bonds, the Wall Street Journal reported late Monday, citing sources familiar with the move.

China has the biggest currency reserves in the world, worth more than $3 trillion. It’s also the biggest holder of U.S. government debt – no surprise then that in recent years any talk that it might unwind some of those bond holdings has led to some nervousness in markets.

“This story has been knocking around for a long time. I suppose if they [Chinese officials] are internationalizing their forex reserves it could be truer now than in the past,” said Bank of Singapore’s chief economist Richard Jerram.

“At the margin it would be bad news, but then what else is going on? The Japanese QE [quantitative easing] is going to leak into bond markets globally and some of that money is going to support Treasurys,” he added, referring to the Bank of Japan’s aggressive asset-buying program.

CNBC

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