China Reviews Eurozone Bond Holdings

As discussed in my post on May 11th (“Foreign Exchange Reserves by Currency”), a big trend over the last several years has been an increasing shift in foreign currency reserves from the US dollar into the euro. From 2004 to 2009, the euro’s share of foreign currency reserves has increased from 24.0% to 27.4%, while the US dollar’s share has declined from 66.9% to 62.1%.

Not coincidentally and as reported by the Financial Times today, China has begun to review its sizable holdings of eurozone debt, which the article suggests could be as high as $630bn (~25% of the country’s total reserves). While the US may benefit in the short-term as China reallocates some of its reserves to dollar-denominated assets, I continue to believe that gold will ultimately be the biggest beneficiary as the yellow metal represents a paltry ~1.5% of the country’s reserve assets (as opposed to the dollar and the euro which collectively account for 95% of the country’s reserves).

Here are a few key paragraphs from the FT article:

China, which boasts the world’s largest foreign exchange reserves, is reviewing its holdings of eurozone debt in the wake of the crisis that has swept through the region’s bond markets.

Representatives of China’s State Administration of Foreign Exchange, or Safe, which manages the reserves under the country’s central bank, has been meeting with foreign bankers in Beijing in recent days to discuss the issue.

Safe, which holds an estimated $630bn of eurozone bonds in its reserves [the country’s foreign exchange reserves totalled $2,447bn at the end of March, up $174bn in just six month]., has expressed concern about its exposure to the five so-called peripheral eurozone markets of Greece, Ireland, Italy, Portugal and Spain.

Any move by Safe would mark a significant change in direction, as Beijing has been trying to diversify away from the US dollar in recent years by buying a greater proportion of assets denominated in other currencies.