China, Russia, Middle East and Treasuries

Perhaps one of the most noteworthy developments at the recent G20 meeting is what wasn't said. There was no major call for a new international monetary regime or a new international reserve asset, like the Chinese and others pushed for at the previous G20 meeting. Similarly there were no calls from US or European officials for a renewed yuan appreciation. Promises to pursue more balanced growth is not the same thing. Price changes should not be confused with the kind of structural reforms that are necessary.

We are struck by the fact that US Treasuries account for a greater share of Chinese reserves now than a year ago. Specifically, China does not report reserve holdings on a monthly basis. The last reserve figures are for June and US Treasury figures for the same month clearly show that US Treasuries accounted for 36.4% of Chinese reserves then compared with 29.6% in June 2008.

Yesterday Saudi Arabia, a G20 member, indicated through its central bank governor that it will not alter is current fx reserves management nor is it planning on selling any of its Treasury holdings. The governor of the UAE's central bank made similar remarks.

Today Russia's central bank indicated more of the same. The First Deputy Chairman of Russia's central bank Alexei Ulyukayev indicated that Russia would continue to hold about 30% of its reserves in US Treasuries. Moreover, he confirmed what some have suspected: liquidity concerns will deter it from diversifying reserves into Australian and Canadian dollars.

In our explanation of the dollar's weakness we have not attributed much significance to talk of diversification of central bank reserves. If anything the IMF COFER data shows that the share of reserves (that the allocation is reported) in dollar-denominated securities actually has risen (slightly) in recent quarters. The IMF will release Q2 COFER data on Sept 30th.