UPDATE 1-China should diversify reserves-stats bureau
Tue Jul 25, 2006 2:20am ET
(Recasts with statistics bureau report)
By Kevin Yao
BEIJING, July 25 (Reuters) - China should speed up diversification of its record $941 billion stockpile of foreign exchange reserves because of the risk of a dollar decline, the National Bureau of Statistics said on Tuesday.
The dollar dipped on the report, even though the statistics agency does not have responsibility for managing the reserves and did not make any specific recommendations.
The report, by the bureau's international centre and posted on its Web site (
www.stats.gov.cn), said global economic conditions were conducive for China to sustain rapid growth.
But it warned of risks, including trade strains with the United States and a continued decline in the dollar, which it said could lead to losses for Beijing and stoke expectations of a stronger yuan.
"We should speed up the pace of diversification of our country's foreign exchange reserves to help resolve the risk of possible losses to the dollar assets in the reserves," the report said.
It also urged China to take effective steps to gradually eliminate expectations of yuan <CNY> appreciation.
"We should continue to push forward market-based reforms of the exchange rate and establish an effective market-based exchange rate," the report said.
Like most countries, China does not disclose the breakdown of its reserves. Economists assume the bulk is held in dollars, but academics have repeatedly called for Beijing to hedge its bets by ploughing a larger share of new reserves into other currencies.
A separate debate has swirled for a couple of years on whether China, with a per capita income of just $1,700, needs such a large hoard of reserves.
HOW MUCH IS ENOUGH?
Critics say the war chest is now big enough to shield China against any financial crisis and the government should let the yuan rise faster to slow the build-up in reserves.
They also say money that is invested in U.S. bonds subsidises American consumption by helping to keep U.S. interest rates low and could be used to much greater effect within China.
But Wei Benhua, deputy head of the State Administration of Foreign Exchange, said China needed enough reserves to finance imports, repay overseas debt and let foreign investors repatriate dividends -- all conditions for maintaining fast economic growth.
"We need to consider China's unique conditions when considering the issue of foreign exchange reserves, because there is no unified standard for defining what level of foreign exchange reserves is appropriate," the official Securities Times quoted Wei as saying.
Wei, whose agency administers the reserve management policies set by the State Council, China's cabinet, did not spell out what would be an appropriate level.
But he said China, as a developing country, needed to import more energy and mineral products to support its economic growth
The reserves must also meet at least three months of imports, repay the country's foreign debt of nearly $290 billion and finance dividends to be repatriated by foreign investors, who had poured a cumulative $600 billion into the country, he said.
The authorities would also consider the needs of domestic firms investing overseas and individuals travelling abroad.
China's foreign exchange reserves, the world's largest, rose $66 billion in the second quarter on the back of record monthly trade surpluses, foreign direct investment exceeding $1 billion a week and speculative money flowing in to bet on a stronger yuan.
The statistics bureau said its rough calculations put hot money inflows at $12.5 billion in May, up from $5.3 billion in April and $4.5 billion in March.
Its report said it would be difficult to rebalance China's trade in the near term because its trade surplus was caused by the relocation of global manufacturing to China.
But to help reduce trade frictions, it said China should slow exports of labour-intensive products to rich nations and increase imports of technology and equipment.