China to shed some dollars

TEXT OF STORY

SCOTT JAGOW: China's foreign currency reserves hit an eye-popping $1 trillion this week. That's the most ever held by a single country. Today, the head of China's central bank said it would diversify that cash across different currencies and investments in emerging markets.That's setting off alarm bells here in the U.S. Marketplace's Steve Tripoli explains.


STEVE TRIPOLI: At least two-thirds of China's reserves are said to be in dollars.

Foreign exchange expert Michael Malpede is with Man Financial. He says a quick sell-off of even a fraction of those holdings could reverberate.

MICHAEL MALPEDE: "The obvious ramification would be is you would have a sharp dollar decline which would cause a spike up in interest rates and maybe a sharp decline in equity markets."

The U.S. and China would lose big from that. So China's likely to diversify slowly, but the nightmare scenario is that if the dollar starts declining other holders of dollars might rush to sell. And that could trigger a panic.

MALPEDE:"I don't know if anybody on the planet can say that it's not going to happen but, the central bankers are well aware of what the situation is."

So any panic-induced sell-off would almost have to be inadvertent, but as trade worldwide imbalances grow more gigantic Malpede says the panic scenario becomes less far-fetched.

MALPEDE:"I'm a little bit concerned that we have an abundance of complacency that it won't happen."

I'm Steve Tripoli for Marketplace.

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