In adapting to the threat of having its foreign exchange reserves frozen, the People’s Bank is likely to shift more of its portfolio into unconventional alternatives, including EM sovereign debt and real assets. But as long as the PBOC wants to continuing managing the exchange rate – and we think it does – then the largest share of its assets will have to remain in Western markets. There are means to protect these assets from seizure but no way to eliminate the risk entirely.
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