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China Stops Stockpiling US Dollars:
Causes and Implications




Oddly, Western mainstream media had almost completely ignored it in the news last month: China's central bank ("People's Bank of China") has officially announced that it will no longer accumulate foreign exchange reserves. Obviously, this includes the US dollar as the main candidate.

The Chinese believe it no longer benefits them to increase their foreign-currency holdings.
The obvious effect of the halt will be: an increase of the yuan's value, but also an increase of production costs in China, as well as higher wages etc. On the other hand, the US dollar and the euro currency will suffer even on mid-term.



Why China Stops Building
Foreign Currency Reserves


The EU, the USA and Japan are all easing their currencies heavily and the economic crises in these regions are a heavy burden on the dollar, the euro and the yen. Because of intense easing and severe economic crises (especially in the EU and the USA), the euro and the dollar have become risky assets.

The rate of inflation in the USA and Europe is being held down artificially.
A more loose monetary policy could set loose a hyperinflationary crisis that the Western World hasn't seen since the "Great Depression" prior to World War 2.

The Chinese central bank might also be worried about the Federal Reserve's possible decision regarding the tapering of monthly quantitative easing. Experts like Peter Schiff believe that the Fed needs to keep the stimulus going, otherwise the US economy would implode.

Although monthly QE is weakening the dollar on the long term, tapering would easily result in a tremendous crash.

Sacha Tihanyi - senior currency strategist of Scotia Bank Hong Kong believes the Chinese are becoming more flexible/less interventionist and (according to this Bloomberg article).

Bloomberg is telling us that the Chinese yuan appreaciated 2.3 % against the dollar in 2013 and, this was the best performance for an emerging market's currency.



Implications for the Global Economy


China wants a stronger yuan, it's obvious. The currency's value was kept artificially low for decades - primarily for the sake of facilitating exports, reducing production costs. But now as China's economy is booming, living standards are on the increase, a stronger currency is needed.

China has been reducing its dependency on exports and is focusing more on internal consumption. Therefore, China could afford a more expensive currency.

The biggest creditor of the United States stops buying America's best export item: the US dollar. This will eventually have a tremendous negative impact on the dollar's value on the long term.

It is also speculated that China is getting rid of its existing stockpiles of dollars step-by-step. If not getting rid, then shrinking the holdings for sure.

One way is to "shop the dollars away". China has been accumulating gold for a long time and the buying has only intensified. Part of that gold is being paid for with US dollars.

So far, this is probably the heaviest blow to the US dollar. It's more severe than previous dollar avoidance cases that we've seen (like in case of Venezuela's and Russia's bilateral trade agreement or, Iran's sale of oil to India in gold).

What is interesting is the fact that China is continuing to accumulate gold reserves. In fact, the trend has intensified this year.





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