Thread: China "worried" about US Treasury holdings

I think the following two articles are related as a way for Chinese government to encourage company to invest abroad. Part of the aspect of "State-sponsored-capitalism" is about "the state" actively setting up directives for companies to follow. An aspect seems to be missed by many economic pundits working for 24 hrs cable "news" (not saying it is good or bad)

Yuan Forwards Advance Most in 2 Weeks on Recovery; Bonds Stable
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By Bloomberg News

June 10 (Bloomberg) -- Yuan forwards rose the most in more than two weeks on speculation China will resume allowing currency gains as its economy recovers from the worst slump in almost a decade. Bonds were little changed.

The economic outlook is the brightest in the region and is expected to “surprise” investors, Stephen Ma, a portfolio manager at Fidelity Investments, the world’s largest mutual-fund company, said at a briefing in Seoul today. Economists surveyed by Bloomberg News predict a government report on June 12 will show industrial production climbed 7.7 percent in May, after a 7.3 percent increase the previous month.

“As the economy recovers, China will reengage with yuan appreciation,” said Patrick Bennett, Asia currency strategist at Societe Generale SA in Hong Kong. “China’s industrial production will be picking up.”

Twelve-month forwards contracts climbed 0.32 percent to 6.7090 per dollar as of 5:40 p.m. in Shanghai, according to data compiled by Bloomberg. The currency’s spot rate was 6.8334, compared with 6.8354 yesterday, according to the China Foreign Exchange Trade System. It may reach 6.60 this year, Bennett said.

A government-backed report published June 1 indicated China’s manufacturing expanded for a third month in May. George Soros, chairman and founder of Soros Fund Management LLC, said China will be the first country to recover from the global financial crisis, the Shanghai Daily reported on June 8.

‘Natural Expectation’

The yuan’s 12-month non-deliverable forwards will rise against the dollar should a government report tomorrow show a forecast “mild improvement” in exports for May, according to Oversea Chinese Banking Corp.

The gap between three- and 12-month forward contracts will widen as signs of a recovery fuel speculation the currency will be allowed to strengthen in the medium term, Emmanuel Ng, an economist at OCBC, said yesterday in an interview.

“As the global recovery story becomes more entrenched, the natural expectation is that China will pull itself quite well from a slowdown and allow further appreciation in the yuan,” said Ng, who is based in Singapore. “But in the near term, the central bank will remain cautious and hold the yuan constant, not trying to send a wrong message to the market.”

The People’s Bank of China has kept the yuan little changed since July last year to help China’s exporters weather a global recession. Overseas sales declined 22.6 percent from a year earlier in April, sliding for a sixth month, and the government announced a 4 trillion yuan ($585 billion) stimulus package to spur spending at home.

The customs bureau is due to release May trade data tomorrow in Beijing. Exports dropped 23 percent from a year earlier, according to the median estimate of 15 economists surveyed by Bloomberg News.

Bonds Little Changed

Government bonds were little changed after inflation figures published today showed prices fell last month. Consumer prices slid 1.4 percent from a year earlier, a fourth straight decline, and producer prices dropped a record 7.2 percent.

The yield on the 3.91 percent note due in October 2038 stayed at 3.99 percent, and the price of the security was 98.62 per 100 yuan face amount, according to the China Interbank Bond Market.

“The bond market reaction to the CPI data today was cold,” said Huang Yehong, a bond analyst at Bank of Nanjing Co., a Chinese lender partly owned by BNP Paribas SA. “Investors showed more enthusiasm in new debt sales.”

The finance ministry sold 28 billion yuan of 15-year bonds today, this year’s first issuance of such a maturity, at an average yield of 3.69 percent, compared with the 3.70 percent median estimate in a Bloomberg News survey.

China Development Bank, the nation’s second-largest long- term debt issuer, sold 10 billion yuan of seven-year floating- rate notes today at 0.30 percentage point above the three-month Shanghai Interbank Offered Rate. The spread fell short of the 35 basis points forecast in a Bloomberg survey.

To contact the reporters on this story: John Liu in Shanghai at jliu42@bloomberg.net.
Last Updated: June 10, 2009 05:53 EDT

China moves to boost foreign investment

10 hours ago

BEIJING (AFP) — China has loosened foreign exchange curbs on firms wanting to invest abroad, with up to 30 billion dollars expected to flow out, state media has reported.

All Chinese firms can use their own foreign exchange funds or buy from the state reserve to finance operations at their overseas arms from August 1, the State Administration of Foreign Exchange (SAFE) said in a statement.

In the past, only large multinational companies were allowed to use their forex to lend to overseas ventures, according to the statement, which was posted on SAFE's website Tuesday.

"We had done a stress test, and the maximum possible capital outflow from this new mechanism will be 30 billion dollars," said Sun Lujun, a SAFE official, according to Wednesday's China Daily.

The move was aimed at helping Chinese companies expand overseas as it has become increasingly hard for them to raise fund abroad due to the global international crisis, SAFE said in a separate statement on its website.

However, the amount that can be lent is capped at 30 percent of the parent's net assets and should not exceed the subsidiary's total investment registered with SAFE, according to the new rules.

The easing of controls on forex outflow "will not cause (a) major impact on China's balance of payments" because the amount of cash unleashed is limited compared with the China's foreign exchange reserves, SAFE said.

China holds the world's largest forex reserves, which stood at 1.95 trillion dollars at the end of March, official data showed.

By the end of 2008, the country had 2.9 trillion dollars in foreign financial assets including both official forex reserves and private holdings, according to the China Daily.

Overseas investment has picked up in recent years, nearly doubling to 52.2 billion dollars last year from 26.5 billion dollars in 2007, it added.

China relaxes control on forex use to help domestic firms invest overseas
English_Xinhua 2009-06-10 05:40:38 Print

BEIJING, June 9 (Xinhua) -- China is loosening its grip on the use of foreign exchange to encourage domestic firms to make overseas investment, as the country sought to diversify the use of its huge forex reserves.

The State Administration of Foreign Exchange (SAFE), the country's forex regulator, said Tuesday in an online notice that it would allow all kinds of firms in China to invest their forex earnings in overseas branches.

Previously, only large domestic or foreign multinationals are allowed to do so. The other firms are required to submit their forex earnings to the government in exchange for the local currency, contributing to the huge pool of the country's forex reserves.

The SAFE said in the same notice that it would allow firms to use self-owned forex and forex purchased with the yuan, expanding the source of forex that firms could use to invest in their overseas subsidiaries.

The administration sets a quota on such forex uses, which is no more than 30 percent of the firm's equity.

Firms still need approvals from the SAFE to use forex in overseas investment, but the administration said it would simplify approval and forex remittance procedures to facilitate such practices.

The SAFE said the relaxed control was aimed to solve the financing difficulties of Chinese firms when they expand overseas, and such support for overseas expansion was meant to boost exports.

China's forex reserves stood at 1.9537 trillion U.S. dollars by the end of March, the largest in the world. To play it safe, China's huge reserves have usually been invested in low-risk but low-yield assets, such as U.S. government bonds.
Editor: Mu Xuequan

Latest OpEd from Wolf. The OpEd cites too much from Goldman Sachs, nevertheless it makes a good comparison. IMHO, GS has been trying to catch up with morgan stanley in Asia for the pass few years.



FT.com / Columnists / Martin Wolf - It is in Beijing?s interests to lend Geithner a hand

It is in Beijing’s interests to lend Geithner a hand

By Martin Wolf

Published: June 9 2009 19:06 | Last updated: June 9 2009 22:52


Creditor countries are worrying about the safety of their money. That is what links two of the big economic stories of last week: Chancellor Angela Merkel’s attack on the monetary policies pursued by central banks, including her own, the European Central Bank; and the pressure on Tim Geithner, US Treasury secretary, to persuade his hosts in Beijing that their claims on his government are safe. But are they? The answer is: only if the creditor countries facilitate adjustment in the global balance of payments. Debtor countries will either export their way out of this crisis or be driven towards some sort of default. Creditors have to choose which.


Germany and China have much in common: they have the world’s two biggest current account surpluses, at $235bn and $440bn, respectively, in 2008; and both are also powerhouses of manufactured exports. They have, as a result, suffered from the collapse in demand of overindebted purchasers of their exports. So both feel badly done by. Why, they ask themselves, should their virtuous people suffer because their customers have let themselves go so broke?

Germany and China are also very different: Germany is a highly competitive global producer of manufactures. But it is also a regional power that has shared its money with its neighbours since 1999. Its problem is that its surpluses were offset by its neighbours’ largely private excess spending. Now that the borrowers are bankrupt, their countries’ domestic demand is collapsing. This is leading to a huge expansion in fiscal deficits and pressure for easier monetary policies from the ECB. So Ms Merkel is driven towards undermining the independence of Germany’s central bank, in order to protect the still more vital goal of monetary stability.

Germany may be Europe’s pivotal economy. But China is a nascent superpower. Without intending to do so, it has already shaken the world economy. Incorporating this dynamic colossus into the world economy involves huge adjustments. This is already evident in any discussion of a sustained exit from the crisis.

A recent paper from Goldman Sachs – unfortunately, not publicly available – sheds fascinating light on the impact of China’s rise on the world economy.* In particular, it broadens the analysis of the role of the “global imbalances”, on which I (and many others) have written.

Chart

The paper points to four salient features of the world economy during this decade: a huge increase in global current account imbalances (with, in particular, the emergence of huge surpluses in emerging economies); a global decline in nominal and real yields on all forms of debt; an increase in global returns on physical capital; and an increase in the “equity risk premium” – the gap between the earnings yield on equities and the real yield on bonds. I would add to this list the strong downward pressure on the dollar prices of many manufactured goods.

The paper argues that the standard “global savings glut” hypothesis helps explain the first two facts. Indeed, it notes that a popular alternative – a too loose monetary policy – fails to explain persistently low long-term real rates. But, it adds, this fails to explain the third and fourth (or my fifth) features.

The paper argues that a massive increase in the effective global labour supply and the extreme risk aversion of the emerging world’s new creditors explains the third and fourth feature. As the paper notes, “the accumulation of net overseas assets has been entirely accounted for by public sector acquisitions ... and has been principally channelled into reserves”. Asian emerging economies – China, above all – have dominated such flows.

The huge capital outflows were the consequence of policy decisions, of which the exchange-rate regime was the most important. The decision to keep the exchange rate down also put a lid on the dollar prices of many manufactures. I would add that the bursting of the stock market bubble in 2000 also increased the perceived riskiness of equities and so increased the attractions of the supposedly safe credit instruments whose burgeoning we saw in the 2000s. The pressure on wages may also have encouraged reliance on borrowing and so helped fuel the credit bubbles of the 2000s.

The authors conclude that the low bond yields caused by newly emerging savings gluts drove the crazy lending whose results we now see. With better regulation, the mess would have been smaller, as the International Monetary Fund rightly argues in its recent World Economic Outlook. But someone had to borrow this money. If it had not been households, who would have done so – governments, so running larger fiscal deficits, or corporations already flush with profits? This is as much a macroeconomic story as one of folly, greed and mis-regulation.

The story is not just history. It bears just as heavily on the world’s escape from the crisis. The dominant feature of today’s economy is that erstwhile private borrowers are, to put it bluntly, bust. To sustain spending, central banks are being driven towards the monetary emissions of which Ms Merkel is suspicious and governments are driven towards massive dis-saving, to offset higher desired private saving.

Today, Germany wants to preserve the value of its money, while China is desperate to preserve the value of its external assets. These are understandable aims. Yet, if this is to happen, debtor countries have to stabilise their economies without another round of profligate private borrowing or an indefinite rise in government debt. Both paths will ultimately lead to defaults, inflation, or both and so to losses for creditors. The only alternative is for debtors to earn their way out. At the level of an entire country that means a big rise in net exports. But if indebted countries are to achieve this aim, in a vigorous world economy, the surplus countries must expand demand strongly, relative to supply.

China’s decision to accumulate roughly $2,000bn in foreign currency reserves was, in my view, a blunder. Now it has a choice. If it wants its claims on the US to be safe, it must facilitate an adjustment in the global balance of payments. If it and other surplus countries wish to run huge surpluses and accumulate vast financial claims, they should expect defaults. They cannot have both safe foreign assets and huge surpluses. They must choose between them. It may seem unfair. But whoever said life is fair?

martin.wolf@ft.com
More columns at FT.com / Comment / Columnists / Martin Wolf
Read and post comments at Martin Wolf’s blog

*The Savings Glut, the Return on Capital and the Rise in Risk Aversion, May 27 2009

Yeah, consumers are the ones to blame for everything...

China’s decision to accumulate roughly $2,000bn in foreign currency reserves was, in my view, a blunder. Now it has a choice. If it wants its claims on the US to be safe, it must facilitate an adjustment in the global balance of payments. If it and other surplus countries wish to run huge surpluses and accumulate vast financial claims, they should expect defaults. They cannot have both safe foreign assets and huge surpluses. They must choose between them. It may seem unfair. But whoever said life is fair?

-- Was talking to someone about the above statement by Wolf; In a purely economic POV, he is correct, however, when added Political MSG into the meal, I think the taste will change.

"But now we're seeing clearly that the crisis will lift China's international status ... With countries asking China for its money, it's found its international influence has also expanded."

China lays road to global role with economic cement
China lays road to global role with economic cement | Reuters

By Chris Buckley and Simon Rabinovitch - Analysis

BEIJING (Reuters) - Last week hosting the Americans. Next week visiting Russia. China's busy diplomacy amid the economic crisis reflects growing sway that some say has brought the moment for Beijing to don the cape of a full super-power.

Many Chinese observers think the woes besetting the wealthy West will help Beijing win a bigger global role, but that expectation comes tethered to warnings China should not oversell its strength - above all, not imagine dislodging U.S. dominance or the dollar any time soon.

"The leadership is fully aware that the United States will continue to dominate despite the financial crisis," said Zheng Yongnian, director of the East Asia Institute of the National University of Singapore, who often travels to China.

"China does see opportunities to accelerate its rise, but it's still far from becoming an overall super-power."

That caution will be on display next week when Chinese President Hu Jintao visits Russia for the first summit of the "BRIC" nations, Brazil, Russia, India and China.

The four fast-growing countries may discuss ways to reduce reliance on the United States, but it is Moscow, not Beijing, that has been most vocal about diversifying away from U.S. government bonds and making the Chinese yuan a global reserve currency.

Just last week, when U.S. Treasury Secretary Timothy Geithner was in Beijing to reassure his hosts about the safety of their vast dollar holdings, Chinese leaders made it clear they, too, wanted to see a strong U.S. economy.

China, however, knows well that the game has changed. Its growing prominence is rubbing against its ingrained preference for a muted international role.

The line of foreign governments looking to Beijing for an economic boost has raised the question of how far China should use its vast savings and continued growth during the global slump to advance broader national goals.

"There was initially some uncertainty about the strategic impact of the financial crisis," said Yan Xuetong, a prominent international relations expert at Tsinghua University in Beijing.

"But now we're seeing clearly that the crisis will lift China's international status ... With countries asking China for its money, it's found its international influence has also expanded."

The discussion is also about the right limits for China's ambitions. The rejection of Chinese company Chinalco's tie-up with global miner Rio Tinto (RIO.AX) last week underscored the pitfalls Beijing faces in extending its reach.

Some nationalists say the economic slump marks the end of American preeminence. But most analysts close to the government stress China remains tied to the much bigger U.S. market and does not have the strength to challenge Washington.

Beijing hopes to boost economic and resource security, regional influence and diplomatic reach without riling the United States and its allies, said Zheng.

"China will continue to climb up the ladder," he said. "But it does not want revolutionary change in the international system."

EXPANDING CHINA'S WEB

China is instead pursuing a more oblique strategy of expanding its web of bilateral and international economic lifelines to nations in trouble.

"China's focus in countering the crisis will be on its regional neighbors," said Qin Yaqing, Vice President of China Foreign Affairs University in Beijing and a government adviser.

At the high tide of the global financial turmoil last September, Premier Wen Jiabao said China's biggest contribution to the world would be ensuring its own economy continued to grow.

That domestic focus remains a cornerstone of policy. But since then, Beijing has also unveiled a flurry of currency swaps, loan-for-oil deals and funding pledges that have shown the government does not want to stand on the sidelines.

That has meant further diluting Deng's long-dominant dictum, laid down during post-1989 isolation and the collapse of the Soviet bloc, that China must "bide its time and nurture its strength," keeping its head down.

"There was already an intense debate about whether China should take on a more proactive diplomatic face in the world. With the crisis, it's become necessity," said Gregory Chin, an expert on Chinese foreign policy at York University in Canada.

"They couldn't continue to lie low, in the old Deng Xiaoping strategy of maintaining a low profile."

Beijing's first foray in direct crisis assistance came in December when it opened a currency swap line to South Korea. By the end of March it had extended swaps to five other nations, from Indonesia to Argentina, for a total of 650 billion yuan ($95 billion).

China has also vowed nearly half that much in loan-for-oil deals since February, giving $45 billion of credit to Russia, Brazil, Venezuela and Angola in return for long-term crude supplies.

On top of these bilateral deals, China has also pledged to invest $50 billion in special bonds for the International Monetary Fund (IMF) and offered $38.4 billion to an Asian regional liquidity fund.

All that money can help trade and ultimately convert into political sway, Chinese experts and former officials have said.

"China can now apply its (foreign) reserves while Western economies are weak and helpless to extend aid to other countries in dire straits and thereby win partners," Zhen Bingxi, a former Chinese diplomat in Washington, recently wrote in the Chinese journal, International Studies.

A POWER COUPLE? NOT YET

There has also been more ambitious talk in Chinese foreign policy circles about a "G2," with Beijing and Washington working as twin rudders of international growth and rule-making.

For now, however, Beijing is likely to remain wary of embracing Washington closely, even if the opportunity arises. Beijing sees U.S. power as injured but still too dominant to match. Deng's dictum of laying low still has some currency.

"American economic dominance has been badly wounded, but its economic strength and overall national strength will remain far in the lead for the next 10 to 20 years," Yuan Peng of the China Institute of Contemporary International Relations in Beijing wrote in a recent paper.

($1=6.84 Yuan)

Surprise to see China is moving forward in this direction in light of the current economic downturn and the lessons learned.

The new changes will ultimately help reduce default risk in China's foreign-exchange market, but having a government body play the role of central counterparty might raise some concerns of moral hazard.

Moral Hazard, LOL, this is the Chinese government we are talking about here, not a shining example of "free-marketeer". I don't think the concept of "Moral Hazard" applies to State-sponsored capitalist. This is sooooooo Sept 2008.


China Sets Stage With New Yuan-Clearing Process - WSJ.com
* JUNE 15, 2009

China Sets Stage With New Yuan-Clearing Process
Foreign Exchange Is Poised as Test Bed for Derivatives Trade


By DENIS MCMAHON

SHANGHAI -- As the U.S. and European Union move toward having central counterparties clear over-the-counter derivative products, China is making similar changes to its foreign-exchange spot market, a move that could lead to the development of more-complex financial markets.

China has been slow to develop derivatives markets, partly because of its experience with bond futures in the mid-1990s, when the market nearly collapsed as one player maneuvered to salvage a losing position.

Beijing's subsequent wariness of any type of speculation has left financial derivatives, key tools for companies trying to manage their foreign-exchange and credit risks, limited in scope and liquidity.

The pending changes, if more broadly applied, may give regulators confidence in their ability to handle more-volatile and heavily traded markets.

"I think that's definitely the case," said Li Yu, executive director at the International Financial Research Center, a Shanghai think tank. "China's focus in developing its financial markets is to put the real economy first. That's not to say that it won't develop [purely financial] trading. But that requires extra caution."

Mr. Li is a former top official at the China Foreign Exchange Trade System & National Interbank Funding Center, or CFETS, which started a multilateral net-clearing system last week for the over-the-counter exchange of yuan. That in itself will free up capital and reduce systemic risk, because banks will be able to settle all the day's trading in one transaction, rather than needing to have sufficient cash on hand to settle each deal individually.

More unusual, however, is that CFETS, the central bank's foreign-exchange and money-market trading platform, will also insert itself as a central counterparty to all deals among 21 market makers, effectively assuming the risk that any one of them may default.

Given that the settlement date for foreign exchange is only two days after a transaction is entered into, that risk is very small in the first place. But CFETS may be using it as an opportunity to build experience in collecting margins and risk management that will help guard against default in markets with longer maturities.

But it may also help support liquidity. While liquidity in international currency markets held up fairly well during the financial crisis, China was an exception, with some banks cutting credit lines with their foreign counterparts.

"There was no trust between banks, so trade collapsed," said a person at Shanghai Pudong Development Bank familiar with the changes. "So the government is now stepping in to ensure that trust and liquidity."

China's regulators haven't said whether they intend to introduce central counterparty clearing to other markets. When asked, the State Administration of Foreign Exchange said it and CFETS will decide after such clearing has been properly tested in the foreign-exchange spot-trading market.

CFETS declined to comment.

Central-counterparty clearing is common among exchange-traded equities and derivative products around the world. But in the aftermath of Lehman Brothers' default last year, U.S. and EU regulators have been pushing for heavily and widely traded OTC products, such as credit-default swaps, to also be cleared by central counterparties.

That results in a major concentration of risk with the central counterparty and requires sophisticated systems that can rapidly adjust collateral requirements and margin calls as insurance against changes in market prices.

"The central counterparty's risk controls need to be of extremely high quality," said Daniel Heller, at the secretariat for the Committee on Payment and Settlement Systems at the Bank for International Settlements, a Swiss-based group of central banks. He expressed doubts about the value of the CFETS trial, given the lack of wide swings in China's foreign-exchange market.

"In an environment of traditionally low exchange-rate volatility, risk management of a central counterparty for foreign exchange is less challenging than in a central counterparty for interest-rate swaps or credit derivatives," he said.

While the financial crisis has ushered in an era of great currency volatility globally, China's response has been to effectively repeg the yuan to the dollar.

CFETS had earlier tried to learn such risk-management skills from derivatives-exchange operator CME Group Inc. Under a 2006 agreement between the two, CFETS was set to become a so-called super-clearing member of CME. That deal would have allowed CFETS members to trade certain foreign-exchange and interest-rate products on CME's Globex platform, but with CFETS acting as a sort of central counterparty.

That deal came unstuck after CFETS, a unit of the People's Bank of China, ran up against difficulties fulfilling U.S. disclosure requirements.

The new changes will ultimately help reduce default risk in China's foreign-exchange market, but having a government body play the role of central counterparty might raise some concerns of moral hazard.

"For market participants, this is clearly a good thing, since it means that the central counterparty will always be there," Mr. Heller said. "However, from a central bank's point of view, it is ambiguous. Is this something the central bank would like to do on a permanent basis? Central banks do not usually run CCPs."

Write to Denis McMahon at denis.mcmahon@dowjones.com

Originally Posted by zraver

Inflation is the only solution- rapid devaluing of the dollar and quick payment of fixed debts, followed by massive hikes in interest rates to slam shut credit and suck dollars back in in order to drive their value back up. It has been done before.

This is scary on multiple fronts- food and energy inflation could ruin my family. But conversely make my mortgage a hell of a lot cheaper. All fixed rate debt will get cheaper in real terms as the dollar devalues. While floating debt will kepe pace with inflation. The US government and homeowners could win big, but anyone holding the debt could lose massively.

Besides being a debt holder, China has another problem, as the dollar devalues the cost of Chinese products goes up and that eats into exports to the US.

Theoretically, yes. But the gov't and Fed has a way of being drunk with cheap credit and money printing, so increasing money supply has never been a problem, but contracting money supply is another story. Glenn Beck showed a chart of monetary base on his program a while ago and it really didn't look like the monetary base has decreased at all in the recent years. And besides, when inflation goes through the roof and nobody buys US treasury anymore and the gov't still runs a huge deficit, who else other than the Fed would be able to buy from the treasury?

Hyper-inflation is going to happen sooner or later. China needs to get out of USD as soon as it can, which is easier said than done since most of the other major currencies are having the same problem. So, they can't get into fiat currencies or IMF bonds. And then there is only so much natural resource they can buy before other nations get super alarmed.

BBC NEWS | Business | Dollar poses dilemma for Bric countries
Dollar poses dilemma for Bric countries

By Katie Hunt
Business reporter, BBC News

Roubles being printed
China and Russia fear the value of their dollar holdings may fall

Brazil, Russia, India and China, collectively known as the Bric countries, are holding their first formal summit in the Russian city of Yekaterinburg.

On the agenda is the role of the dollar and its status as the world's dominant currency.

China, Russia and, to a lesser extent, Brazil have expressed a desire to see the dollar one day replaced as the world's main trading currency.

And fears that these big holders of dollar assets may be looking to switch from the US currency have unsettled financial markets and US politicians.

"Although China's call for a new reserve currency is premature, it is legitimate," says Yao Shujie, a professor of economics at the School of Contemporary Chinese Studies at the University of Nottingham.

Stir

Chinese and Russian officials have questioned the dollar's status as the dominant currency on several occasions in recent months.

Brazil has also expressed concern although India remains less active on this front.


CURRENCY RESERVES
Foreign currency held by a government or a central bank
Used to pay foreign debt obligations or influence exchange rates
The dollar is viewed as the world's reserve currency as the vast majority of reserves are held in the US currency
About 90% of all foreign exchange transactions involve the dollar

Dollar's reserve status 'is safe'
China suggests switch from dollar

China's central bank governor caused a stir in March when he said the US dollar should be replaced as the world's largest reserve currency by the Special Drawing Right (SDR) - a unit of account issued by the International Monetary Fund.

And Russian President Dmitry Medvedev said at the beginning of this month that the idea of a "supranational currency" should be discussed at the Bric summit.

These concerns have in part led to a decline in the dollar against other major currencies in recent months and sent jitters through the market for US government debt.

'Substantial impact'

As two of the world's biggest holders of US dollar assets, China and Russia fear that the steps that the US is taking to boost its economy and help it recover from the financial crisis could undermine the value of the US currency.


BRIC COUNTRIES
Brazil, Russia, India, China
Account for more than 13% of world economy
Account for 40% of world population
Term 'Bric' coined by investment bank Goldman Sachs

"If you own trillions of dollar assets, the last thing you want is any more dollars being printed," says Simon Derrick, currency strategist at Bank of New York Mellon.

"A 10% fall in the dollar has, in theory, a substantial impact on China's spending power," he adds.

China and Russia have already taken some small steps to diversify their currency reserves away from the dollar:

* China has made arrangements with six countries worth 650bn yuan ($95bn) that allow trade to be conducted in renminbi rather than dollars

* China and Russia have said they will buy bonds to be issued by the IMF

* Data released on Monday showed that both China and Russia had trimmed their holdings of US government bonds in April.

But analysts say the Bric countries are unlikely to mount a real challenge to the dollar's supremacy.

Any concrete suggestion of a wholesale switch away from the dollar would dramatically undermine the value of their own reserves.

"They are expressing their frustration but there's little they can really do about it. They can only take steps on the margin," says Jan Randolph, head of sovereign risk analysis at IHS Global Insight.

Charm offensive

These developments have not gone unnoticed in the US.
President Hu Jintao arrives in the Ural Mountains city of Yekaterinburg, Russia
China is uneasy over its vast holdings of dollars

A weaker dollar and rising government bond yields can make it more expensive for the US government to borrow money.

This ultimately could lead to problems in financing the measures taken to help the US economy recover.

To address these concerns, US Treasury Secretary Timothy Geithner visited China at the end of May to give assurance over the safety of dollar assets, and met with his Russian counterpart over the weekend at the sidelines of the G8 finance ministers meeting.

His charm offensive appears to be working, at least for now.

The dollar rose on Monday after Russian Finance Minister Alexei Kudrin said it would not be replaced as the world's reserve currency in the near future and China's vice foreign minister Ha Yafei has assured the US that "nobody is talking about dumping the US dollar".

China and Russia may now have decided that it is self-defeating to make comments that undermine the value of the dollar and thus the value of their own reserves, says Mr Derrick at Bank of New York Mellon.

But this does little to alter the basic unease Russia and China feel over their vast holdings of dollars.

"While officials may feel that it is appropriate to provide verbal support for the dollar, it will ultimately be their actions that matter," says Mr Derrick.