China figures how to unload U.S. bonds without selling them

4:50p ET Sunday, April 1, 2007

Dear Friend of GATA and Gold:

Here are more comments from China suggesting that China's objective should be (or maybe already is) to trade its U.S. government bonds for assets in other countries without actually selling the bonds -- to exchange the bonds for real property and producing assets so that when hyperinflation and debt repudiation explode in the United States, someone else will be holding China's bag.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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China's Diversification
Away from Dollar Would Cause
Losses in Reserves: Economist

From AFX News
via Forbes.com
Sunday, April 1, 2007

http://www.forbes.com/markets/feeds/afx/2007/04/01/afx3571266.html

BEIJING -- China won't be able to follow a growing trend among countries to reduce their dollar exposure because of the threat this would pose to the value of the country's existing large holdings of dollar-denominated assets, a senior government economist said.

Xia Bin, an economist with the Development Research Center and a vocal proponent of more aggressive foreign exchange reserve management, noted the increasing shift out of dollars around the world, particularly by oil exporters.

"Everyone knows that they should try to cut their US dollar assets. But, of course, if China wanted to make such a move, a big cut, our losses would be large as well. That would be very difficult to do," he said.

Some 70 percent of China's more than $1 trillion in foreign exchange reserves is estimated to be held in US dollar-denominated assets and most of that is parked in low-yielding but safe US Treasury or government-sponsored agency paper.

Xia said that the ability of the People's Bank of China, the central bank, to control money supply growth is weak, and that the government should speed up the creation of a new foreign exchange reserve vehicle to ease pressure on the central bank.

"We should speed up the research, preparation, and operation of the new foreign exchange reserve investment company to ease pressure on the central bank's macro-economic controls during this special period," Xia said.

He suggested that bonds be issued to soak up liquidity and purchase foreign exchange reserves from the central bank for overseas investment, arguing that such a transaction wouldn't add to inflationary pressure.

State media reported last week that Xia was one of five government economists called in by the committee tasked with setting up the new foreign exchange reserve vehicle to canvas his opinion.

Xia also said that China should stick to its own pace in opening up its financial markets and "not bow to Paulson's pressure."

US Treasury Secretary Henry Paulson called on China to speed up the liberalization of its financial markets in a speech in Shanghai last month.

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