Beijing wary of doing anything to provoke further US dollar decline
Having amassed a vast amount of foreign reserves valued at about US$1.33trillion, China is caught between a rock and a hard place by the steady decline in the value of the greenback on global foreign exchange markets.
On the one hand it would like to hedge against the erosion of value the dollar's decline causes for its foreign reserves - an estimated US$700billion of which are held directly in long- and short-term dollar assets, chiefly US treasuries; but on the other hand any large-scale selling of the dollar by the People's Bank of China in favour of the euro, for instance, would trigger even sharper falls in the exchange value of the dollar as it is dumped from China's reserves.
The appreciation of the yuan by nearly 9 per cent against the dollar since China switched to a managed float for its currency against a trade-weighted basket of currencies in July 2005 has, by these measures, already wiped about US$63billion off the value of its reserves.
Over the same period of little more than two years, the euro, on the other hand, has gained in value against the yuan.
In July 2005, it took 9.79 yuan to buy one euro, whereas today it requires 10.84 yuan - an appreciation in the euro-yuan exchange rate of 10.7 per cent.
It is small wonder then that mainland officials have periodically signalled their frustration with this state of affairs, dating back to 2004, when China Business Weekly reported that China was looking to diversify out of US dollars.
