China's foreign exchange reserves top $2 trillion for first time

Even though China's exports remain under pressure, its foreign exchange reserves grew to over $2 trillion for the first time. The People's Bank of China reported that reserves increased in value by $178 billion during the April to June period to $2.13 trillion.

"With a subdued trade surplus, export revenues are clearly not driving reserve growth. The majority of the gains appear to have come from valuation changes due to the depreciation of the dollar, which boosted the value of China's non-dollar holdings," Alaistair Chan of Moody's told MarketWatch. China is one of the countries looking to diversify its foreign exchange holdings. Yet it is estimated that 65 percent of its foreign exchange holdings are in U.S. Treasuries. Other holdings include the euro, yen and sterling.

In another surprising move, China's top currency regulator opened the door to allow Chinese companies more flexibility in financing outbound investment and permitting funds to be transferred overseas without prior approval. "The rules are intended to give companies more room to develop overseas and reduce their pain in adjusting growth and models," Liu Guangxi, an inspector for the state foreign exchange administration, told reporters in a briefing.

This move is part of China's attempt to diversify foreign investments and reduce the impact of a drop in the value of U.S. Treasuries. Premier Wen Jiabao is "worried" about the safety of China's U.S. assets. He's made a lot of noise about wanting to diversify China's holdings because he questions the amount President Obama plans to borrow to fund stimulus spending.

"The rapid expansion in foreign-exchange reserves is making it more difficult for China to preserve their value," Yang Shengkun of China Citic Bank told Bloomberg. "To encourage companies to 'go global' would be a good way" to slow the pace of reserves accumulation.

China's move to open the door for its companies to more easily do business globally will go a long way to reducing the pressures on its ballooning reserves and may move China closer to operating on an even playing field economically. The Obama Administration began putting pressure on China and its currency manipulation almost from day one. Maybe some of those discussions are finally bearing fruit.

Lita Epstein has written more than 25 books, including The Complete Idiot's Guide to Foreign Currency Trading.

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