beyondbrics

So the secret is out. After years of silence, China has disclosed that around 65 per cent of its $2,450bn of foreign exchange reserves is in US dollars, with 26 per cent in euros, 5 per cent in pounds and 3 per cent in yen.

As the China Securities Journal, an official newspaper, reported, that’s broadly in line with the global average – and it is roughly in line with long-standing estimates. So, no surprise there. But the numbers highlight why China is worried about a possible depreciation of the US dollar.

Beijing will have another chance to voice its concerns when Larry Summers, US president Barack Obama’s top economic adviser, arrives in China on September 4th for three days on a visit announced on Thursday by the White House.

Coincidentally or not, just as the China Securities Journal was publishing its scoop, Hu Xiaolian, a vice-governor of the People’s Bank of China, warned that depreciation loomed as a risk for developing countries’ foreign exchange reserves.

“Once a reserve currency’s value becomes unstable, there will be quite large depreciation risks for assets,” she wrote in the latest issue of China Finance, a central bank magazine, according to Reuters. She repeated China’s long-standing discomfort with a global financial system dominated by a single currency.

“The outbreak and spread of the global financial crisis has highlighted the inherent deficiencies and systemic risks in the current international currency system,” she said.

“A diversified international currency system will be more conducive to international economic and financial stability,” she added, urging greate cross-border use of the yuan.

The White House said Summers would travel with Thomas Donilon, the deputy national security adviser for talks with Chinese ofificals on “a wide range of issues touching on bilateral and international issues.” While Washington gave no details, it is expected that currency policies will figure prominently in the meetings, including China’s move in June to allow greater flexibility in the yuan exchange rate.

Beijing made the move after persistent American pressure for currency appreciation, but the announcement has not been followed by any significant revaluation of the Chinese currency. With US politicians demanding tougher action and mid-term elections due, the domestic pressure on the Obama administration to increase the pressure on China to revalue – or take retaliatory measures – can only grow.