China's central bank says it is concerned about a possible significant fall in the value of the US dollar and the impact that would have on global financial markets.
If the external capital stops flowing into the US, the US dollar may face a significant slide, the People's Bank of China said in its 2006 Financial Stability Report.'
It said that this could lead to a fall in consumption and investment as well as interest rate increases and financial market turbulence.
The Chinese central bank warned that international holders of US dollar assets may start to adjust their foreign exchange holdings to reduce risk.
'If the US current account deficit growth continues to be higher than GDP growth, the investment value of US assets will be questioned by global investors, and the willingness of investors to continue holding and buying US financial products may weaken, the central bank said.'
China has been cautious in its statements about the dollar. It now has over one trillion dollars in foreign exchange reserves, the world's biggest, and about 70% of that is believed to be held in dollar-denominated assets.
Chinese officials have talked of diversifying the nation's foreign exchange holdings, but they do not want to trigger a sharp sell-off that would reduce the value of the assets China now holds.
Instead, economists have suggested that China has been adding less rapidly to new dollar holdings as a percentage of new foreign exchange reserves. The dollar has already fallen significantly this year against the euro, recently hitting its lowest point since March 2005.
