China Insists it Won't Dump its Dollars

China Insists it Won’t Dump its Dollars

From Staff Reports

China’s ambassador to the United States has taken steps to assure Congressional leaders that China has no plans to dump its U.S. dollar reserves as a way of retaliating against the United States for its attempts to strong-arm China into revaluing the Chinese Yuan currency, according to published reports.

“I’d like to assure you that the top leaders and officials of China have stated that China’s dollar-denominated foreign reserves will not be affected, and China does not have the plan to drastically adjust the structure of its foreign reserve,” Chinese ambassador Zhou Wenzhong told U.S. Sen. Charles Grassley of Iowa, ranking member on the Senate Finance Committee.

“On Aug. 12, China’s central bank, the People’s Bank of China (PBOC) reaffirmed this stand,” Zhou also wrote.

Reserves reached $1.33 trillion at the year’s midpoint, an increase of nearly 26% from the $1.06 trillion in reserves China had at the end of December, just six months before. And the growth has been accelerating: That six-month gain was greater than the $247 billion increase for all of last year, the English-language China daily’s online edition reported.

Analysts had previously said that foreign reserves were expanding by $200 billion every six months, a growth rate that’s now been officially eclipsed.

China’s soaring trade surplus has been the biggest source of the growth in foreign reserves, acting as a spigot spilling every major currency into that country’s coffers.

Just this week, the U.S. government reported that this country’s trade deficit with China jumped 5.7% in June to reach $21.2 billion, the biggest total since January. At the present rate, the United States will easily surpass the 2006 total of $233 billion – and even that was the biggest imbalance ever recorded with a single country. In the first half of this year alone, government reports state that the U.S. trade deficit with China is more than 15% ahead of last year.

The overall trade deficit is also expanding at an alarming rate, according to many economists.

The deficit with China is growing even in the face of a series of major product problems that range from tires to toys, and include high-profile problem with pet food. Also this week, toy-industry giant Mattel Inc. said it was implementing a recall involving millions of toys – including some of its famed die-cast toy cars that may have lead paint problems. Mattel recalled 1.5 million China-made toys, ostensibly because of similar paint issues.

But Chinese Ambassador Zhou says he wants to work to “further strengthen (the) constructive relationship of cooperation” between China and the United States. In a statement carried on the PBOC’s website earlier this week, the central bank noted that the U.S. greenback has an “important status” in the international monetary system and in global trading, business and finance, and underscored that it remains an “important component” in China’s reserves – of which more than $420 billion is in U.S. dollars.

Prior to its summer break, the U.S. Senate approved two bills that could lead to tariffs on imports from China – unless China allows the Yuan to appreciate against the U.S. dollar, and in a big way. Within days, China appeared to hint they could dump dollars into the financial system. This could be incredibly damaging – if not disastrous for the United States, and for the capital markets in general. But most experts say it’s not likely this would happen. At least not yet. The Yuan had appreciated against the dollar by about 9.5% over a two-year period since it was allowed to start to float. But it’s drifted backward, and now is up only about 8.8%.
http://www.moneymorning.com/2007/08/17/china_keeping_dollars/