China, who has a $1.8 trillion foreign exchange stockpile, is feeling the heat in the wake of the Fannie Mae and Freddie Mac mortgage crisis.  China’s top experts are suggesting that the country diversify its reserves in order to keep the risks to the stockpile at a minimum.  According to Zhang Ming, a Chinese Academy of Social Sciences researcher, the emergency rescue showed that bonds and treasuries were also falling right along with the American dollar.

While China has never come out and declared how its Forex stockpile was managed, it is believe that the country has invested heavily in treasuries and dollar denominated corporate bonds.  If the two countries are required to increase the coupon payments on the future bonds, the book value of the bonds would be reduced.  When this happens, the Forex reserve in China may be in big trouble.  It would be ‘the tip of the iceberg’ according to Zhang in the financial straits of China and possibly the rest of the world.