China is urging the United States (US) to take measures and boost worldwide confidence in the US dollar and the US government. This came after investors became worried that the US could default on its debt after US leaders tried to raise US$14.3 trillion debt ceiling before it runs out of money.
The State Administration of Foreign Exchange (SAFE), the agency that manages US$3.2 trillion of China‘s foreign exchange reserves, is hoping that the US government will take actions to boost global financial market confidence as well as protect investor interests.
China‘s reserves are invested in US Treasuries and seen as the world’s biggest and most liquid asset class. This ranks Beijing as the biggest creditor with two-thirds of its reserves invested in the US.
There are now concerns and questions are being raised whether Beijing will cut its US Treasuries investments because SAFE says they might cut the US’ credit rating.
However, and while China may have the prerogative to stop relying on the dollar and invest its reserves in other assets, SAFE recognized that US Treasuries are crucial for both US domestic and international investors. It acknowledged that China cannot invest too much of its reserves in oil, gold and silver knowing that these markets are small and very volatile.
Foreign exchange reserves, if invested too much in the volatile markets mentioned, could push up market prices and may affect consumption and economic growth and development.
