China's new Investment Company

Re. the Xinhua News report http://www.forexfactory.com/news.php?do=news&id=49335 , China's new investment company is set to start operations today, with a primary directive of diversifying a portion of China's huge reserves on a profitable (i.e. not political) basis. I don't have any deep understanding of this is going to work, but my impression is that given China's reserves are largely USD instruments, and that the nature of diversification + China's own requirements vis-a-vis commondities and technology would imply a large share of that investment is going to go outside the US, the end result could be pretty hard on the greenback. Comments?

thought china changed its reserve to euros? Didn't they?

They've been switching some of their USD assets into EUR assets, but that doesn't mean they converted all of it.

The big deal with China is they used to peg their currency (CNY) to the USD. Since the USD is weak, they're able to flood the global market with cheap products that they're making... it's sort of opposite of what happened to Japan in the 1990's*. US Business leaders and the gov't have begged China for years to de-peg their currency, and they finally did this last year... however, they're still putting tight controls on the valuation of the CNY.


* Japan's economic success in the 1980's caused the Yen to become really strong. Then in the 90s, Japanese products became too expensive for the global market because their value was denominated in JPY. Since no one bought their products, the ensuing Japanese depression of the 1990s occurred. Their solution was to drop interest rates to zero to artificially weaken the JPY.

I just hope it doesn't trade like bank negara did.