Posted by: michaeldavidpower | October 7, 2009

The Canard of China’s FX Loss if the US Dollar Falls

Whenever someone predicts the US Dollar’s imminent demise as the world’s sole Reserve Currency, some talking head pops up on CNBC or Bloomberg and says “China does not want this to happen because it will lose money on its FX reserves”.

IF YOU THINK ABOUT THE WHOLE OF CHINA’S BALANCE SHEET NOT MERELY ITS FOREIGN CASH COMPONENT, ITS US DOLLAR FX LOSSES ON ITS CASH HOLDINGS WILL BE DWARFED BY THE US DOLLAR REVALUATION GAINS ON THE REST OF ITS MOSTLY DOMESTICALLY LOCATED CNY ASSETS.

Brutally put, China in its entirety would have a big US Dollar net gain if the US Dollar were to fall against the Chinese Yuan.

China does not want to devalue the Yuan against the US Dollar for reasons wholly unassociated with this canard: that they will suffer fx losses if the CNY were to appreciate against the USD.

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