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Strategies & Market Trends : True face of China -- A Modern Kaleidoscope -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (610)	11/15/2006 11:36:12 PM
From: RealMuLan	Read Replies (1) \| Respond to of 12464

"All central bankers are trying to diversify their reserves" Brad Setser \| Nov 09, 2006 rgemonitor.com And some are perhaps trying harder than others … Zhou’s quip seems to have generated a fair amount of attention, in the Treasury market as well as in the Fx market. It should, given the size of his portfolio. PBoC chief Zhou told Reuters: ``All central banks are trying to diversify,'' he told Reuters on the sidelines of a European Central Bank conference in Frankfurt. ``We have had a very clear diversification plan for several years.'' The data so far suggests that central bankers have been far more successful at diversifying out of Treasuries into other types of dollar denominated debt (China has been a leader here) than at diversifying out of the dollar. Russia is to my knowledge the only major central bank that has diversified the currency composition of its reserves in a significant way in 2006. Countries like India, Malaysia and Thailand have long been diversified. But some others may have done so quietly, though there isn’t much evidence for diversification in the global data. I suspect the real constraint here has been the fact that a lot of the countries that want to diversify their reserves also want to maintain a peg to the dollar. That limits your options. Zhou presumably knows this better than anyone. Shifting out of dollars at points in time when private investors do not want dollars tends to put pressure on the dollar. And on the exchange rates of countries that peg to the dollar. The last thing China and the Gulf need are weaker exchange rates … Indeed, the available evidence suggests that central banks actually increased their dollar purchases in the first half of 2006 relative to their dollar purchases in 2005. Why? It was easier to diversify in 2005 when the market wanted dollars rather than euros and the euro was falling than in 2006, when the dollar has slid against the euro. ..