The United States Treasury International Capital report showed that China has been selling its Treasuries for a third month in a row in October 2007, which may signal for the start of the funds diversification.
Yuan rose by 0.06% after this release, climbing up to 7.3828 per U.S. dollar from 7.3873 at the close yesterday, according to the China Foreign Exchange Trade System. Since the elimination of the strict peg to dollar by Chinese government in 2005 the yuan increased by 12% in value against the U.S. currency.
China possesses $1.46 trillion worth of foreign currency reserves, almost whole part of which is in the U.S. dollars. The possibly started and much talked about diversification of the foreign reserve funds will lead to the fast yuan appreciation as the tie to the weakening dollar will be melting
It is very like for the Chinese central bank to continue the cut in the U.S. Treasuries in the next month as the China’s concerned with the elevated inflation growth, which can be fought with a stronger yuan. But, of course, the diversification process will be very slow not to hurt the dollar’s value. Faster weakening of the dollar is not acceptable for the Chinese economy, as the reserve fund’s total value will decline in this case.
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