Is China Set to Decrease Exposure to U.S. Dollar?

January 10, 2006 – China’s Central Bank said on Tuesday they do not have any plans to shift a large portion of it’s foreign exchange reserves away from the U.S. dollar and government bonds.

However, the statement conflicts with China’s State Administration of Foreign Exchange, who last week indicated China would likely sell dollars from it’s foreign exchange reserves.

Due to accumulations estimated at $15 billion a month, China’s foreign reserves are currently over $800 billion and are expected to approach $1,000 billion this year. A move away from using a large proportion of dollars with that money could put heavy downward pressure on the greenback, thus further hurting U.S. economic growth.

Talk of less exposure to the dollar is a sign China is worried about a substantial drop in U.S. currency as a result of a skyrocketing U.S. trade deficit.

Read the Associated Press article about the China Central Bank’s denial.

Read the Washington Post article examining the potential impact of China selling U.S. dollars.

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