The one trillion dollar mark is a perfect hook.  Richard McGregor's excellent story in today's FT is the first of no doubt many stories on China’s phenomenal stockpile of reserves.

McGregor highlights my argument that the composition of China’s reserves is a second order issue, at least from China’s point of view.  Shifting reserves from dollars to euros won’t prevent China’s central bank (the PBoC) from taking losses if the RMB appreciates against both the euro and the dollar.  And, as my regular readers know, the RMB sure looks undervalued against the euro.   The size of China’s capital losses will be primarily a function of the size of China’s reserves – not the composition of China’s reserves. 

But that is not the reason to read McGregor.  I don’t have any influence over Chinese policy.   But a lot of the other folks that McGregor quotes do.  He provides a great window into the internal Chinese debate, and that is really the only debate that matters.

What struck me? 

The PBoC’s worries that it will be blamed for taking big losses on its foreign exchange portfolio, even though those losses were basically “baked in” -- to use Dr. Swagel's phrase -- at the moment China bought its current holdings of dollar bonds at an inflated price.