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US$ still the anchor of Chinese reserves

Central bank official affirms policy after calls for a switch to stronger currencies

 

WASHINGTON – THE US dollar will remain the anchor currency of China‘s massive foreign reserves, despite suggestions that they were too heavily skewed towards the weakening greenback, said a senior Chinese central bank official.

Mr Yi Gang, the People’s Bank of China’s assistant governor, said on Wednesday that the dollar had to continue as the key component of the country’s US$1.4 trillion (S$2.03 trillion) reserves, because it was ‘the largest currency that we use’ in terms of trade and foreign direct investment (FDI), as well as financial clearances and settlements.

‘It is also a very firm policy for China that in our reserves, the US dollar is the main currency, and that policy is very firm,’ he said in reply to a question at a forum in Washington. Mr Yi, who is also the central bank’s director-general of operations, said recent suggestions by a senior Chinese politician, as well as a state banker, that Beijing move its largely dollar-based reserves towards currently stronger currencies, such as the euro, were mere ‘opinion’.

 Comments, particularly by Mr Cheng Siwei, the vice-chairman of China‘s Parliament, that strong currencies ought to be given more weight in the country’s reserves to offset the losses in weak ones, sent the dollar into a tailspin last week.

The market chaos led US Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson to defend the dollar’s position. ‘Dollars remain the dominant reserve asset and I expect that to continue to be the case,’ Mr Bernanke said. Noting that the greenback had been the world’s reserve currency since World War II, Mr Paulson said: ‘I put the US economy up against any in the world in terms of competitiveness.’

 

Before Mr Yi’s remarks, the dollar fell close to a new record low against the euro in London, as weak US retail sales bolstered speculation about another interest rate cut by the Fed. The single European currency was trading at US$1.4658 in New York in the early afternoon on Wednesday, against US$1.4600 a day earlier. In London, the euro at one point rose to US$1.4725, just off the record US$1.4752 it set last Friday.

 

Mr Yi said that while the central bank diversified the major currencies making up its reserves, ‘the point is the principle for our diversification and the principle that guides us for these reserves is that they should be proportional to our real economic transactions – meaning trade, FDI, and clearance and settlement.’

 

About 70 per cent of China‘s huge foreign exchange reserves are generally believed to be held in US dollar-denominated paper, mainly US government bonds. This has proved to be a less-than-ideal investment, due not just to the low yields on government debt, but also the weakening of the dollar.

 

China‘s reserves, which overtook Japan‘s for the world’s top spot early last year and topped US$1.43 trillion in late September, have been boosted especially by the nation’s huge trade surplus.

 

Source: AGENCE FRANCE-PRESSE (The Straits Times 16 Nov 07)

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