On shit and fans.

This is a news story that some readers might pass by with a ho-hum, but it's pure uh-oh.

The Financial Times via MSNBC:


China indicated on Thursday it could begin to diversify its rapidly growing foreign exchange reserves away from the US dollar and government bonds - a potential shift with significant implications for global financial and commodity markets.
Economists estimate that more that 70 per cent of the reserves are invested in US dollar assets, which has helped to sustain the recent large US deficits. If China were to stop acquiring such a large proportion of dollars with its reserves - currently accumulating at about $15bn (€12.4bn) a month - it could put heavy downward pressure on the greenback.
In a brief statement on its website, the government's foreign exchange regulator said one of its targets for 2006 was to "improve the operation and management of foreign exchange reserves and to actively explore more effective ways to utilise reserve assets".
It went on: "[The objective is] to improve the currency structure and asset structure of our foreign exchange reserves, and to continue to expand the investment area of reserves.
"We want to ensure that the use of foreign exchange reserves supports a national strategy, an open economy and the macro-economic adjustment."
The announcement came from the State Administration of Foreign Exchange (Safe). It gave no more details about whether this meant a big shift in the investment strategy for Chinese reserves, which according to local press reports reached nearly $800bn at the end of last year and are expected by economists to near $1,000bn this year.
There are many dire scenarios out there that start with China deciding it's not going to keep purchasing our debt. Most are, IMHO, fortunately overblown.

But the answer to those scenarios, "China couldn't afford to let the U.S. economy crash" has a fatal flaw: they don't have to.

Might they give us a tweak in the name of pure geo-political wrangling? What kind of reaction would we see in the financial markets, in real estate if they do?

I'll follow up on this story soon.

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