Monday, October 26, 2009

China reserve diverisification story but real issue is yuan appreciation

More talk from China on reserve diversification.

"...A newspaper published under the People’s Bank of China carried an analysis piece by a mid-ranking central bank official that said, in part, that China should increase its holdings of euro and yen in its now dollar-heavy foreign-exchange reserves."

We have heard this before and the story was not new news, but like a twig breaking before nervous herd of zebras, the pack will move immediately and sort out the details later. This makes for an unsettled market.

The main story from China is not dollar reserves but the need for yuan appreciation. It has moved in lock-step with the dollar and has made China goods cheaper around the world. This is driving the growth in China except it is at the expense of the rest of the world. If China sells more goods away from US, then it will be natural that they will want to further diversify reserves. The global imbalance story is still front and center.

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