Danger of Forex Reserves Change

Li Yang, an ex-adviser of the People’s Bank of China, suggests a great care in handling any changes to the country’s foreign currency reserves (world’s largest), that are currently composed mainly of U.S. dollars. By the Li’s words, it’s not reasonable to change the vast amount of current reserves, but the new income that goes to the reserves can be exchanged to other currencies.
The main problem with changing the national reserves’ currency denomination is the high volatility, which will jump the Forex market if any change to a $1.43 billion reserves would be made. Dollar could depreciate by the yet unseen speed after so large sale by he China’s central bank, sending many world economies (including China’s) to a deep recession. More than that, Li warns against even small changes to existing funds – the costs involved in the transaction and handling its possible consequences will be higher than the possible gain from such diversification.
Chinese government understands that storing almost one and a half trillion dollar in one currency is dangerous and it will take steps to cut its dependence on the U.S. currency. But perhaps this change will be more stepwise and it will be touching only new funds, without sinking down the U.S. dollar on Forex.

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