China's massive hoard of $1 tn foreign exchange reserves is throwing challenges to the US as well as its economy.

China has crossed yet another milestone: Its foreign exchange reserves have reached the $1 tn mark in the month of November 2006. It is now the largest holder of foreign exchange reserves in the world. The reserves exceed the level of the safety motive and keeping its currency yuan undervalued level. Thus, the global economies, specifically the US, have fear of China's act of piling up huge reserves. The sheer size of the reserves has been the trigger for the new debates on how else the money might be deployed. China's State Administration of Foreign Exchange (SAFE) has a serious job before them to manage the huge stack of foreign currency holdings. Although the Chinese authorities have been feeling proud of the foreign reserves, the downside of spending these reserves is a big concern.

When China opened its economy for foreign investments in 1979, it had only $2.5 bn foreign reserves, by the year 2000 reserves have reached $200 bn. For the past three years, $200 bn as foreign reserves has been added each year and the total reserves reached $1,000 bn milestone in 2006. The growth in the reserves has slowed down in recent months, yet it is averaging $16 bn a month. Huge capital account surplus as a result of the high saving rates and undervalued yuan, inward FDI and speculative capital inflows over the past two years have led to a massive hoard of foreign reserves.

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