People's Bank of China Currency Reserves: Biggest Bubble of All Time? -

The People's Bank fo China continues to amass huge levels of foreign currency reserves with little attention paid. Those reserves totaled $2.4 trillion as of December 2009, which is larger than the GDP of Italy, the world's 7th largest economy. China's reserves are growing at about $400 billion per year, roughly adding Norway's economy to their reserve surplus every year.

China's huge arsenal of reserves is increasingly troublesome. William Pesek of Bloomberg has called it a "massive and growing pyramid scheme." China is essentially trapped in its current arrangement; as it buys more US Treasuries, it becomes harder to sell them without causing huge capital losses.The challenge for China alone is like trying to park an Airbus A-380 super-jumbo in a Volkswagen. Like all pyramid schemes, there’s no easy end in sight and things could end badly. If the dollar collapses, panicked selling by central banks looking to limit losses would shake global markets more than the U.S. credit crisis has. Two, reserves are dead money.

It seems unlikely that China fall victim to the same lost decades that were experienced in the US and Japan. However, this "bubble" in reserves may be an indicator of an economy overheating. We are starting to see the early warning signs in other asset classes in China.

For more: People's Bank of China Currency Reserves: Biggest Bubble of All Time? -- Seeking Alpha