China Says It Will Dump Dollar

FreeMarketNews.com
November 08, 2007

In two October articles, FMNN predicted a coming Chinese dollar dump. The UK Telegraph has confirmed it (see below). And yesterday Bloomberg ran the news as well.

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Bloomberg story as follows:

The dollar slid to record lows against the euro and the Canadian dollar after a Chinese government adviser said plans to diversify foreign-exchange reserves will involve buying better-performing currencies.

The currency slumped to a 26-year low against the pound and a 23-year low against the Australian dollar. Cheng Siwei, vice chairman of China’s National People’s Congress, told a conference in Beijing the country “will favor stronger currencies” when adjusting its $1.43 trillion of reserves. He later added that doesn’t mean buying more euros.

“We’re likely to see further pressure on the dollar,’” said Thomas Harr, senior foreign exchange strategist in Singapore at Standard Chartered Plc, a U.K. bank that makes most of its profit in Asia. “The potential for diversification is quite big. This a structurally negative story for the dollar.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=aDV6XhaTyJZg&refer=home

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The UK Telegraph is reporting that Asian dollar outflows are exceeding expectations, led by China and Japan. This confirms recent stories here at FMNN, including this one, now updated.

1. Original Title: Chinese $ Sell-Off Rumors Triggers Concern, Rash of Conspiracy Reports (2)

See also:

2. http://www.freemarketnews.com/WorldNews.asp?nid=49620
China $200 Bil ‘SuperFund’ Set to Drain American Dollars

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Today, the Telegraph reports:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/10/16/bcnchina116.xml

Japan and China led a record withdrawl of foreign funds from the United States in August, heightening fears of a fresh slide in the dollar and a spike in US bond yields. The US requires $70bn a month in capital inflows to cover its current account deficit. Data from the US Treasury showed outflows of $163bn (£80bn) from all forms of US investments. “These numbers are absolutely stunning,” said Marc Ostwald, an economist at Insinger de Beaufort.

Mr Ostwald warned that US bond yields could start to rise again unless the outflows reverse quickly. “Woe betide US Treasuries if inflation does not remain benign,” he said. The release comes a day after the IMF warned that the dollar was still overvalued and likely to face “some depreciation in the medium term”.

Asian investors dumped $52bn worth of US Treasury bonds alone, led by Japan ($23bn), China ($14.2bn) and Taiwan ($5bn). It is the first time since 1998 that foreigners have, on balance, sold Treasuries.

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Previous FMNN report continues here:

In its ongoing struggle to disinflate its own economy and drain some of the trillion-plus devaluing American dollars that it holds, China’s leadership has apparently authorized the hush-hush creation of a US$200 billion “super fund” that will purchase raw materials around the world, according to FMNN sources close to the Chinese top leadership. The report comes on the heels of a previous FMNN report that Chinese banks have begun to cautiously trade down China’s horde of American dollars via international currency markets

In its ongoing struggle to disinflate its own economy and drain some of the trillion-plus devaluing American dollars that it holds, China’s leadership has apparently authorized the hush-hush creation of a US$200 billion “super fund” that will purchase raw materials around the world, according to FMNN sources close to the Chinese top leadership.

The so-called superfund will consist of assets of Chinese institutions whose investments will be swapped out for mostly for American dollars that will then be re-invested in foreign assets, the kinds of commodities that China needs to fuel its roaring economy.

China is awash with cash - dollars, euros, etc. - and the amount of cash in the country is inflating its stock market and causing interest rates to plummet despite the efforts of the leadership to slow the country’s tremendous growth rate - which some believe is approaching a classic “bubble.”

By re-exporting the dollars and euros that are flooding in, China can likely remove some inflationary pressures and have a positive effect on real interest rates as well. Additionally, China will be realizing ownership of assets around the world, and doing so in a non-controversial way as the ownership will not be obvious.

China previously was subject to a spate of bad publicity when it tried to take over large raw material companies in Canada - a move that was ultimately rejected amidst a chorus of indignation from Canada’s political leadership and business community.

While the move may be positive for China’s currency position and guarantee an increased exposure to commodities, it will likely put more pressure on the struggling American dollar.