WSJ reported that the share of the $3.2 trillion of China's official reserves allocated to the U.S. dollar dropped from 75% in 2002, to 65% in 2010 and to 54% in 2011. Are they going to stop financing us? Is the world going to end?
No. Point No. 1: They have been cleverly diversifying, buying low-selling high for years. When the dollar was weak at $1.60 per euro, they bought dollars. Now that the dollar is stronger at $1.30 per euro, they try to allocate a larger share of each year's increase in reserves to other currencies. Point No. 2: The yield on the 10-year Treasury went from close to 4% at the beginning of 2010 to around 2% in 2012. I also bought more bonds in 2009-10 than in 2012 to lock in higher rates. This is just common sense, not a devious plot to take over the world or reflection on the dollar losing its reserve status.
The bigger story about this that people miss is: Why do we have no foreign currency reserves while they have huge ones? Who is scared here?
The mercantilist closed capital account policy has worked for China redirecting investment inward. Now the signs of wasteful investment into real estate and infrastructure are growing. The only solution to that will not be a "smarter" government interference in the economy (the U.S. is currently proving the case), but the opening of the capital account.
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