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China may slow foreign investment

Amy Scott Mar 20, 2007

KAI RYSSDAL: Chances are you’ve never heard of a newspaper called Emerging Markets. But a report on the paper’s website today caused a bit of a stir. It suggests China plans to stop buying foreign reserves.

No small matter in a global economy where Beijing’s got a trillion or more dollars or more in the bank. The Chinese government’s one of biggest buyers of U.S. Treasury bonds, which helps prop up the dollar and funds our growing trade deficit. But Marketplace’s Amy Scott reports from New York, currency traders aren’t all that worked up about it.

AMY SCOTT: To many, it’s almost unthinkable that China would stop hoarding foreign reserves. The country’s central bank has stockpiled more than $1 trillion in overseas currencies and other assets.

Which is why Ronald McKinnon is suspicious of today’s report. He teaches economics at Stanford University. McKinnon says China’s central bank buys U.S. dollars in part to keep the value of its own currency, officially called the renminbi

, down.

RONALD MCKINNON: It would literally be impossible for China now to withdraw from the foreign exchange market. The renminbi would simply leap.

McKinnon and many currency traders believe today’s report may have been inaccurate or misinterpreted. The governor of China’s central bank is quoted as saying “We do not intend to go further and accumulate reserves.” McKinnon suspects the central banker was talking not about China’s official foreign reserves, but about a new government corporation announced recently to invest a portion of those reserves.

MCKINNON: This new investment corporation is more to make it seem as if they’re not accumulating official reserves as fast as they have been. It’s window dressing.

Staff at the London-based newspaper couldn’t be reached for comment. Currency investor Axel Merk expects to see some clarification in the morning. But he says what is clear is that China is diversifying its reserves away from U.S. treasuries. And if that happened quickly, the dollar would plunge.

AXEL MERK: So it would have negative ramifications in . . . for economic growth, it would have negative implications for inflation, it would have negative implications for the dollar.

And it wouldn’t be great for China either. Merk says if the country’s own currency shot up, that would trigger a recession. And with the summer Olympics coming up in Beijing, officials aren’t about to let that happen.

In New York, I’m Amy Scott for Marketplace.

RYSSDAL: Traders might say they’re not worried about what Beijing might or might not do, but somehow the dollar fell today against both the euro and the yen.

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