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January 12, 2018

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Forex scare report may be ‘fake news’

CHINA is diversifying its foreign exchange reserves in order to safeguard their value, the country’s currency regulator said yesterday, while dismissing a media report the government is halting or reducing its purchases of United States debt.

Bloomberg News reported on Wednesday that Chinese officials reviewing the country’s vast foreign exchange holdings had recommended slowing or halting purchases of US Treasury bonds amid a less attractive market for them and rising US-China trade tensions.

That spooked investors worried that sharp swings in China’s massive holdings of US Treasuries would trigger a sell-off in bond and equity markets globally.

The report sent US Treasury yields to 10-month highs and the US dollar lower.

“The news could quote the wrong source of information, or may be fake news,” the State Administration of Foreign Exchange said on its website.

The US 10-year Treasury yield edged down to 2.5366 percent from Wednesday’s close of 2.549 percent, while the dollar gained 0.3 percent to 111.72 yen after the regulator’s comment.

China has been diversifying its foreign exchange reserves investments to help to “safeguard the overall safety of foreign exchange assets and preserve and increase their value,” the SAFE said.

The foreign exchange reserves investment in US Treasury bonds is a market activity, with investment professionally managed according to market conditions and investment needs, it added.

The regulator added that foreign exchange reserves management agencies are responsible investors in international financial markets.

Economists say they expect China to continue to adjust its holdings of US government debt, considered to be the most liquid dollar assets, but few believe dumping US Treasuries is among policy choices to be considered by top leaders.

“Given our big Treasury holdings, sometimes we sell some and sometimes we buy some, changes will not be very big and there won’t be big impact on markets,” said Xu Hongcai, deputy chief economist at the China Center for International Economic Exchanges, a government think tank.

“We should have full confidence in the US Treasury debt market, its depth and capacity are very big,” he said.

China’s foreign exchange reserves, the world’s largest, rose US$129.4 billion in 2017 to US$3.14 trillion, as tight regulations and a strong yuan continued to discourage capital outflows, data from China’s central bank showed.

That marked a turnaround after China spent nearly US$320 billion in 2016 to defend the yuan, which fell 6.5 percent against the surging dollar. The yuan gained around 6.8 percent versus the dollar last year.

China’s holding of US government debt — the world’s largest — climbed US$131 billion in the first 10 months of 2017 to US$1.19 trillion, data from the US Treasury Department showed.

The debt holdings accounted for 38 percent of China’s total reserves, up from 35 percent at the end of 2016.


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