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Forex reserves tests China wealth handling ability
(Xinhua)
Updated: 2006-01-16 20:25
China's huge foreign exchange reserves, which amounted to 818.9 billion U.S.
dollars by the end of 2005, have become a major news item that arouses much
interest at home and abroad.
Chinese banknotes
on display in Beijing.[AFP] |
The government's foreign currency regulator's recent remark, that it will
"further optimize forex reserve assets and widen forex reserves investment scope
this year," has sparked a downward trend for the U.S. dollar in the
international foreign exchange market.
Zhou Xiaochuan, governor of the People's Bank of China, the central bank, has
publicly denied rumors that China would sell off some of its U.S. Treasury
bonds.
An industry insider, who asked not to be named, explained in an interview
with Xinhua that people worldwide are not showing much interest in the U.S.
dollar since the cycle of U.S. dollar interest rate hikes by the US Federal
Reserve is almost at an end.
Besides, the United States' huge trade deficit is still there. So any
speculation in this regard can cause market response, he noted.
He said that China's decision to optimize its forex reserves is simply an
illustration of the business principle of "not putting all your eggs in one
basket."
"China needs to diversify its holdings to ensure their more effective
management because forex reserves are climbing very fast," he said.
However, he noted that this does not mean that China will sell off its U.S.
dollar holdings.
Figures published by the United States showed that while the U.S. dollar
holdings of Japan and other countries fall, China's holdings are rising, the
industry insider said.
An independent "chain" exists between China and the United States as China
has a huge trade surplus with the United States, which helped increase China's
forex reserves.
On the other hand, China spends forex reserves buying U.S. Treasury bonds,
which helps reduce the latter's trade deficit.
"So, if China decides to sell off its dollar assets, it will be beneficial
neither to China nor to the United States," the insider said.
His view was that U.S. dollar still dominates the international currency
system and is still the main currency used in international settlement.
Besides, he said, if one takes a long-term view, the U.S. economy is
performing better than the economies of Japan and the European Union countries.
This means that holding U.S. dollar assets instead of other currencies can
achieve much better returns, he said.
China's foreign exchange reserves, the second largest in the world only after
Japan, have grown remarkably in recent years thanks to strong fund inflows and a
burgeoning trade surplus.
"The pace of build-up of forex reserves will continue to be strong in 2006,"
the insider said. "It's only a matter of time before China overtakes Japan."
He urged the central government to diversify currency holdings and buy
corporate bonds to expand investment channels.
As to whether China's forex reserves are too big, Yu Weibin, a Ph.D with the
Financial Institute of the Chinese Academy of Social Sciences, stressed the
important role of forex reserves in dealing with financial crises, natural
disasters and accidents and in supporting people's confidence in their own
currency.
China should not change its policies regarding the forex reserves, Yu said.
However, he urged the government to adjust the structure of forex reserves
and increase the proportion of mid- and long-term foreign treasury bonds with
higher returns, so as to achieve better returns.
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