China may be preparing to cut its foreign exchange reserves by about two-thirds, down to about $1 trillion from its current $3.04 trillion level, according to Chinese news service Xinhua.
Why? China simply has too much money, according to Zhou Xiaochuan, the head of the People’s Bank of China. “Foreign-exchange reserves have exceeded the reasonable level that our country actually needs,” he recently said.
Zhou noted that China’s stockpiling cash is “feeding inflation and becoming difficult to manage”. To be certain, China is suffering from an inflation problem, already up over 5 percent, not to mention a tremendous real estate bubble that threatens its very financial system. It needs to figure out a way to restore price stability.
So, Zhou wants to diversify the country’s assets of foreign exchange holdings, an obvious target.
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