The Fed is set to replace China as the largest holder of the US treasuries.

(source: Bloomberg)

Chinese government does not have much choice here.  It can’t ditch dollar – that’s the only international reserve currency today, probably the safest one in time of crisis;  It can’t buy gold, not much. Otherwise, it will push up gold price dramatically.  It can’t buy high-growth currencies, like Aussie dollar or Brazilian real, either:  the appreciation of these currencies will make China’s imports of natural resources more expensive.

Chinese central bank is left with roughly three choices:

1) buy assets denominated in Euro and Yen – Germans and Japanese then won’t be happy because now every country  seems to have adopted a “beggar-thy -neighbor” policy, trying to increase exports through currency devaluation.

2) buy hard assets, such as oil, gas and mines – that’s what China had been doing.  But this is likely to stir a lot of nationalism –   Nobody likes such government-led big purchase of its own natural resources, especially this government is led by a Communist Party.

3) equity investment in or partnership with good-solid companies.  Companies like Warren Buffet’s Berkshire Hathaway, Goldman Sachs, JP Morgan, Coca-cola, HP, etc…these solid blue chip companies with diversified international portfolio.

In the long term, China should work on designing an alternative international monetary system – a system not based on any paper currency of a single country.