Cheng Siwei, former vice-chairman of the Standing Committee . . . said Beijing was dismayed by the Fed's recourse to "credit easing." . . . "If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.Edward Harrison of RGE Monitor explains:
For months now, the Chinese have signalled growing unease with U.S. monetary policy. And now comes the clearest signal yet that they are moving away from the dollar. . . . The $2 trillion in U.S. dollar reserves the Chinese already have are a sunk cost. Going forward, the Chinese are free to do as they wish with incremental additions to reserves.Which is to say there is a limit to the willingness of Beijing to keep funding endless deficit spending. If China starts shorting the dollar . . . Oh, this could get ugly.
Expect a lot of public pushback from Geithner and Bernanke, who will emphasize that this one official was not expressing actual policy for Beijing. But I rather doubt the markets will be spun so easily.
Watch gold prices today. Wall Street won't be open until Tuesday, but gold is traded globally 24/7 and that price will tell you whether investors are taking this Chinese official's remark seriously.