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