Wednesday, June 28, 2006


Asian US$ Returns 'Will Be Zero': Summers

The China Daily website has this report on central banking. "A leading Chinese central bank official said that countries around the world should gradually rely less on the U.S. dollar for trade and their foreign exchange reserves. The remark comes after the repeated suggestions by former U.S. Treasury secretary Lawrence H. Summers, that the world's biggest holders of U.S. Treasury bonds ought to find better ways to invest their hard-earned money."

"'Internationally speaking, the situation of over-reliance on a certain country's currency for international trade, settlements and reserve assets should be gradually changed,' Wu Xiaoling, deputy governor of the People's Bank of China, said. Wu did not specifically refer to the dollar by name, but it is the world's main reserve currency and the one in which the bulk of trade is conducted."

"Summers contends, the central banks of those countries invest their hoards of foreign securities, totaling several trillion dollars, in safe but low-yielding U.S. T-bonds, the Washington Post reported on June 22. The return 'will be zero' on those bonds after inflation and currency changes are factored in, Summers said."

"Analysts say China has been gradually diversifying away from holding predominantly dollar assets in its foreign exchange reserves, the world's largest, ever since or even before the central bank's decision to scrap its decades-old RMB peg with the U.S. dollar, and the phase-in of a new exchange rate regime which is linked to a basket of foreign currencies in July 2005."

"But the upshot, in Summers's view, is 'the central, global financial irony of our times': Countries that need capital to finance rapid development are shipping more money to the United States than is flowing in the opposite direction, the Washington Post reported."

"The Sino-U.S. trade gap was the result of global resource allocation by multinational companies and needed to be addressed through the combined efforts of the United States and Asian countries, Wu said. 'Such trade imbalances cannot be resolved simply by adjusting the exchange rate. It should be mainly resolved by adjusting the economic structure,' she was quoted as saying."

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