China’s SAFE Announcements Have Market Spectators Scratching Their Heads

July 15th, 2010 by

China’s State Administration of Foreign Exchange (SAFE) made headlines earlier this week when they made a series of announcements on their website aimed at dispelling rumors that they would be selling off U.S. and Dollar-denominated assets in an attempt to reduce their growing surplus imbalances.

The government branch stated Wednesday that the U.S. Treasury market is “a very important market for China,” and that the (alleged) $900 billion China holds in U.S. Treasury debt “should not be politicized.”

The notice came, it seems, in almost direct response to the whirlwind of speculative news stories over the past two weeks surrounding China’s G20 summit announcement that they would be allowing the Yuan to appreciate against the U.S. Dollar. Investors are worried about the bilateral trade flows and how China will seek to balance their own payments. The obvious answer seemed to be gold, but SAFE nipped that one in the bud as well.

“Gold is globally recognized as a store of value and can be used for urgent payment, but there are some limits to investing in gold, and it cannot become a main channel for investing our foreign exchange reserves,” stated SAFE. “If we buy a large amount of gold, it will push up global gold prices…which will eventually hurt the interests of Chinese consumers.”

The sum of these two events has market spectators wondering what exactly China intends to do. One obvious answer is that China is relying on the market’s “invisible hand” to take over. This will effectively use their rising currency as a means by which to equilibrate trade and balance payments, but this solution seems far-fetched. It would likely take much longer than anyone is willing to wait.

What doesn’t bode well for China is their reputation for opacity when it comes to governmental and central banking practices. Many believe China will buy gold, and that they’ll do it with U.S. Dollars. China’s claim they’re not interested in gold doesn’t have everyone convinced.