Firstly, the volatile situation emerged around the financial stability of a number of EU countries can undermine the credibility of the euro and cast doubt on the effectiveness of integration. Secondly, according to the statement of the U.S. Federal Reserve head Ben Bernanke of February 25, the U.S. budget deficit might be a problem in the future - if the bond market thinks that the U.S. Congress is not serious about the issue of reducing that figure. Thirdly, a reduction from the PRC of its dollar-denominated assets, primarily U.S. Treasury bonds and U.S. mortgage securities, as well as the continuation of China's weak Yuan policy will possibly increase the likelihood of major shifts in world currency markets.
So far, China has been the world leader in investments in U.S. Treasury bonds, or its largest creditor. According to the FRS statistics of December 2009, China owned U.S. Treasuries worth $ 755.4 billion. It has reduced its portfolio of U.S. Treasury securities to $ 34.2 billion in comparison with April 2009. Now, Japan is in the first place with $ 768.8 billion.
Since 2001, Beijing has pursued a policy of increasing dollar-denominated assets. In particular, if in 2001, value of PRC owned U.S. bonds amounted $ 79 billion, in late April, the figure exceeded $ 801.5 billion. Nowadays, Beijing decides to balance the structure of its international reserves (gold reserves) against the backdrop of the global financial crisis, fluctuations in world markets, as well as the economic situation within the United States.
China increasingly calls for the diversification of gold reserves. Whole 2009 expert and political circles of China called on the Government to reduce the rate of investment of gold reserves in the U.S. national debt. Their concerns relate to the higher inflation in the U.S. as a result of anti-crisis policy of Washington that could threaten weakening of China's gold reserves invested in dollar assets. In turn, China's Foreign Ministry said the decision to reduce the investment of the Chinese gold reserves in U.S. Treasury bonds was made solely under the influence of market forces and economic needs of the PRC.
According to some experts, the reduction of investments in U.S. Treasuries occurs just in time and reflects the long-term trend of the weakening of the U.S. currency. In this case, the U.S. national debt has increased steadily, and there are no prerequisites for changing the situation in the direction of improvement. Meanwhile, the U.S. administration plans in 2010 to resort to record volumes of borrowing to finance the huge federal budget deficit. The weakening of the dollar may assist to achieve a new balance in the American economy, reduce debt load, and support domestic production and exports.
Nevertheless, some other experts tell that the PRC, at least in the short and medium term, is not going to abandon the dollar-denominated assets, and depending on the economic situation is going to invest its gold reserves in U.S. assets.
The fundamental prerequisite is the close trade and economic ties between Washington and Beijing. Main export flows of China focused on the U.S. market. In fact, a large proportion of China's economic growth is gained through its exports. In 2009, the amount of Chinese gold reserves increased to more than $ 450 billion. For china at this time, there are no tools in world financial markets capable of replacing the United States Treasury bonds.
Although in recent years China has been buying assets in various regions of the world, it still gives preference to U.S. Treasury bonds, as they are less risky and favorable for Beijing's security policy of portfolio investments.
In general, it can be noted that Beijing's decision is dictated mainly by two reasons. The first is diversification of the gold reserves structure with a focus on balancing the dollar-denominated assets in it. The second concerns about the possible inflation in the U.S., due to anti-crisis measures taken by the administration of Barack Obama, as well as unchecked growth of the U.S. budget deficit. Here, judging the actions of the PRC, we can conclude that the restructuring of Chinese gold reserves will be gradual. China will remain among the leading creditors of the U.S. government, its investment in the government bonds in the short term will rise at one moment and fall at another. In the long term, however, considering the globalization and regionalization of economic processes (G-20, EU, Asia Pacific, Latin America, etc.), we can assume that the structure of China's gold reserves will consist of a large number of leading currencies.

Nodir Jumaniyazov, Ph.D.
Expert of the CPS