China’s currency regulator on Wednesday urged the U.S. to take steps to keep confidence in the dollar and avoid default. The message, posted on the regulator’s website, was a response to questions about whether Beijing would be unloading Treasuries in the event of a downgrade of U.S. Treasuries.
Reuters reported that the State Administration of Foreign Exchange said on its website, “We hope the U.S. government will take responsible policies and measures to boost global financial market confidence and respect and protect the interests of investors.” The action indicates the concerns, not just of China, but of other big investors in U.S. debt as politicians continue to dispute ways to deal with the debt ceiling. Default and/or downgrade will occur should they fail to take appropriate actions.
China would like to divest itself of some of its U.S. holdings, but few acceptable options exist—certainly not in the quantity Beijing would require. The Asian nation holds $3.2 trillion in foreign exchange reserves, and estimates are that two thirds of that amount are in dollar assets. This leaves Beijing few options. The regulator acknowledged the importance of Treasuries, saying in a statement that they are “an important investment product for both U.S. domestic and international institutional investors.”
While Beijing can look toward commodities as another place to stash some of its reserves, again, it can only buy so much without endangering its own economy. Oil, gold and silver, it said, are markets that are too small and too volatile. “Chinese companies and households consume a large amount of gold and crude oil,” it said in a statement. “If we use much of our foreign exchange reserves to invest in such areas, we could push up market prices, which may affect our people’s consumption and economic development.”