China's massive foreign currency reserves

Thursday, January 19, 2006 at 11:12 AM

Since we know are inextricably linked to China in both debt and trade, it pays to pay attention to economic news from China.

This past weekend, China's central bank announced that the nation's foreign currency reserves had increased to a record $819.9 billion, with almost $50 billion of that having accrued during the fourth quarter of 2005.

While the NY Times article on the announcement notes that even the official Chinese media are "beginning to question the wisdom of this policy," the same article also notes that some critics "say the government's policy of investing about 70 percent of reserves in dollar-denominated assets is selling China short...these investments include some $247 billion in United States Treasury debt. The critics argue that these relatively low-yielding investments amount to a huge transfer of wealth from a relatively poor country to a rich one. They say the money can be invested more profitably in China's growing economy."

A story in the International Herald Tribune reports that the Chinese government "may be considering using its excess foreign reserves to buy imported oil and build a strategic oil reserve."

In any reading, can you say this is good news?  If they decide to buy less US debt, we need to find a replacement for them or hike interest rates in order to attract a replacement.  If they plan on building a large oil reserve, you know that that's going to mean to oil prices.

Ah, the 21st century.