Over the last couple years, the Central Bank of China has built up a
treasure trove of foreign exchange reserves ($1.8 Trillion at last
count), as part of its effort to hold down the Yuan, or at least slow
its appreciation. Unfortunately, these reserves have depreciated
significantly-10% per year in real terms- as the Yuan has risen relative
to the Dollar. These reserves may slide further in real terms, as the
credit crisis diminishes the value of the mortgage securities that
comprise almost 20% of its portfolio. In order to
shore up its
capital position, the Bank may be forced to accept an infusion of
capital from China’s Finance Ministry and halt the appreciation of the
Chinese Yuan. The New York Times reports:
China finds itself hemmed in. If it were to
curtail its purchases of dollar-denominated securities drastically, the
dollar would likely fall and American interest rates could soar.
Read More:
Main Bank of China Is in Need of Capital
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