China To Dump Euro?

First Japan, now China. Two of the worlds largest savers are thinking about getting rid of their holdings in the troubled European currency. Just a few months ago, the mighty Asians announced plans to reduce their dollar reserves in favor of the euro. Now the tables have turned completely.

“This is a big strategic shift. Last year, the Chinese were trying to reduce their exposure to dollar assets by buying euro zone assets. This would be a complete reversal.”

Anonymous investor (Financial Times)


Representatives of China’s State Administration of Foreign Exchange, or SAFE, which manages the reserves under the country’s central bank, has been meeting with foreign bankers in Beijing in recent days to discuss a reduction of euro related assets in the nations foreign exchange reserves, the Financial Times reports.

We have already heard that Japanese investors – some of the worlds’ largest savers – have turned extremely negative on the euro.

Now it’s being reported that the Chinese officials of SAFE, the state administration of foreign exchange – who are the world’s largest investors – are evaluating their holding of euros.

China, which boasts the world’s largest foreign exchange reserves, is reviewing its holdings of euro zone debt in the wake of the crisis that has swept through the region’s bond markets, the Financial Times writes.

The importance of this news is not so much that it signifies a sudden short-term withdrawal of funds, but a long-term strategic shift.

70% per cent of China’s official reserves of $2.5 trillion are invested in dollar assets, and China had planned to re-balance this portfolio in favor of euros – which would have strengthened the euro’s global role.

The crisis has now reversed this trend – and put paid to any hopes that the euro could benefit from a stronger global role.

(By the way; the euro dropped below $1.22 on the news in Asian trading last night).

One investor says to Financial Times:

“This is a big strategic shift. Last year, the Chinese were trying to reduce their exposure to dollar assets by buying euro zone assets. This would be a complete reversal.”

A spokesman for SAFE refused to comment.

An estimated 70% of China’s foreign reserves are held in U.S. dollar securities, but the composition and management of the funds controlled by SAFE are regarded as state secrets.

However, analysts point out that SAFE rarely cuts its existing holdings significantly, due to the vast amount  of new money to invest every month.

Instead, it reduces the proportion of new investment devoted particular assets, and thereby reducing the weighting of that asset in its overall portfolio.

According to the latest figures announced by SAFE, the country’s foreign exchange reserves totaled almost 2,5 trillion dollar at the end of March, up by USD 174 billion in just six months.

Separately, a Chinese diplomat says he is “worried about” the effect of Europe’s debt crisis and the weakness of the euro on the global recovery and China’s country’s exports.

“The euro’s fluctuation will have an impact on China’s thinking, but it’s only one element” in any decision to allow the Chinese currency to rise vice foreign minister He Yafei  says, according to Bloomberg.

China’s official reserves have been growing at a rapid pace for years, driven by inflows of foreign capital, a large trade surplus and restrictive cross-border capital controls.

SAFE, which holds an estimated $630 billion of euro zone bonds in its reserves, has expressed concern about its exposure to the five so-called peripheral euro zone markets of Greece, Ireland, Italy, Portugal and Spain.

Any move by SAFE would mark a significant change in direction, as Beijing has been trying to diversify away from the US dollar in recent years by buying a greater proportion of assets denominated in other currencies.

The consequences of such action by Chinese authorities can only be imagined.

Market Snap Shots

Today’s movement in eur/usd illustrates more than anything else that investors are not sure what to believe.

However, after a short rally earlier Thursday, the RSI is now overbought, and a reaction down can be expected any time soon.

EUR/USD:

EUR/JPY:

Pretty much the same pattern in the eur/jpy relation.

Related by the Econotwist:

Merkel, Obama, Sarkozy Have Investors Shitting Their Pants

European Banks: “Leman Times Ten”

Welcome Back to Earth, Mr. Market

Proposal For New Single European Bond

RBS Analyst Warns Investors

Euro-Slide Continues After Spanish Bank Rescue

Albert Edwards: Europe On The Edge Of A Deflationary Precipice

“Sending Europe Back To The 1950′s”

Fitch: Credit Markets Still Deteriorating

Stock Market Guru: Sell Everything!

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0 thoughts on “China To Dump Euro?

  1. Pingback: | Binary Options Trading Resource | Banc De Binary

  2. Pingback: China To Dump Euro? « Econotwist's Blog | Forex Exchange

    • UPDATE ! RSI just jumped up in over-bought territory again, so you might see a minor setback in the next hours. Still, the euro seem to continue to rise, and my bet on a more sideways movement in the next couple of days stands.

      AllTheBest
      econotwist

    • Based on the charts, and a few simple technical indicators, it seem like the eur/usd is gonna move more sideways in the coming hours and perhaps days. The RSI broke through 70 nine times today, but went down below 30 only four times. That usually suggest that there’s still a light upwards pressure.
      Right now RSI is approaching under-bought territory, something that might indicate a euro-rally in Asian trading Friday morning.

      IMPORTANT: I’m not a financial adviser, nor do I trade actively. My views are only my subjective opinion based on more than 20 years of observing. Any trading decisions you make is stricktly your own responsibility.

      That said:
      I Wish You The Best of Luck!
      econotwist

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