China's foreign exchange reserves have been calculated by US dollars. Among China's over US$500 billion foreign exchange reserves, 80 percent are US dollars assets, in which most of them are used to buy US treasury bonds. The drop of US dollars inevitably brings about shrink of foreign exchange reserves. If China converts 80 percent of its US dollar assets into Euros, almost US$40 billion of its more than US$500 billion foreign exchange reserves have vaporized in the past half year since May 13.

Facing the descending trend of US dollars people begin to worry about that China's huge amount of foreign exchange reserves will shrink by significant margin.

Member of the Currency Policy Commission of the Central Bank Mr. Yu Yongding notes: China has taken precautions. The rate of US dollar assets in China's foreign exchange reserves has declined.

On November 25 Mr. Yu revealed at the seminar of "Asian Financial Cooperation and International Financial Issues" at Shanghai University of Finance and Economics that China has begun reducing US dollar assets in its foreign exchange reserves, in which the growing pace of holding US treasury bonds has slowed down in 2004. The current total volume is approximately US$180 billion.

In recent years the growth of China's foreign exchange reserves has been fairly rapid. From 1993 to 2003, China's foreign exchange reserves have grown from US$21.2 billion to US$403.3 billion. And by the end of China has held US$158.089 billion US treasury bonds, which accounted for 39.2 percent of China's foreign exchange reserves.

From January to September 2004 China's foreign exchange reserves increased by US$111.2 billion and reached US$514.5 billion.  Meanwhile, US treasury bonds only increased US$16.31 billion. The rate of US treasury bonds in China's foreign exchange reserves declined to 33.9 percent, dropped by 5.3 percent points.

China adjusted its capital structure through reducing holding of US treasury bonds in its foreign exchange reserves. Obviously, while China tries to avoid losses, the prospect of US dollars will be more gloomy.

The news that China's central bank has reduced the rate of US treasury bonds in its foreign exchange reserves has aroused sensational feedbacks in the world market. On November 26 the exchange rate of US dollars to Euros hit another new lowest point. And various term bonds in the US market went down generally.

Mr. Zhong Wei, Director of Financial Research Center of Beijing Normal University states that such reaction reflects extreme disbelief to US dollars in the international market.

"From the perspective of financial psychology the market has entered Panic Transition Period", he says.

Mr. Zhong points out that US current account deficit accounts for 50 percent of its GDP. The rate of financial deficit in GDP is 4 percent. The United States should have at least US$1 trillion capital inflow to maintain capital balance.

Japan and China are the biggest buyers of US treasury bonds, holding approximately US$900 billion together. The reduction purchase of US dollar assets by Japan and China will definitely bring about significant effects to the US dollars.