rock and hard space

[Dan Scanlan <coolhanduke@xxxxxxxxxxxxx>]

http://asia.news.yahoo.com/061125/3/2tgsm.html

Dollar assets hard to diversify, Chinese FX official admits

BEIJING -- Countries holding large stockpiles of foreign exchange
reserves face problems diversifying their holdings away from
dollar-denominated assets because of the potential market reaction
to any such move, a senior Chinese forex official said on Saturday.

The official, Guan Tao, deputy director-general of the general
affairs department of the State Administration of Foreign Exchange
(SAFE), highlighted the potential pitfalls of such a move without
specifically referring to China or its plans for managing its
reserves.

"It is very difficult for these countries to make significant
adjustments in their reserve asset portfolios," Guan told a forum,
adding that that was his personal view and not a statement of SAFE
policy.

"As we all know, every move by these countries in the market is
under the spotlight," he said. "Once you say 'forex reserve currency
diversification,' regardless of whether you're talking about the
past or the present, there will definitely be market reaction."

A growing chorus of Chinese government economists has begun calling
for Beijing to shift some of the country's reserves, the world's
largest at more than $1 trillion, away from dollar assets and into
other currencies or strategic resources such as oil.

The composition of the reserves is a state secret but bankers and
academics assume that at least two-thirds is invested in dollars,
mainly U.S. government debt.

The role of the United States in world trade meant that it and major
holders of foreign exchange had formed a mutually dependent
relationship, said Guan.

"The U.S. buys cargo, and countries with a trade surplus buy U.S.
treasuries -- they actually have no other choice," he said.

"If I have a surplus on the trade account, if I have foreign exchange
income, I can certainly invest part of it in non-dollar assets, but
the size of the market for non-dollar assets is very limited, so
the great majority of foreign exchange reserve assets has to be
invested U.S. financial markets."

Therefore, it was very unlikely that currency markets would see any
massive selloff of dollars by countries with large reserves, Guan
said.

"Given that U.S. dollar liquidity is currently mainly held by a few
monetary authorities, we feel that the possibility of a big fluctuation
in the dollar is very small -- at least for now," he said.