(AFP) – Nov 14, 2007
WASHINGTON (AFP) — The US dollar will remain the anchor currency of China's massive foreign reserves despite suggestions that they were too heavily skewed toward the weakening greenback, a senior Chinese central bank official said here Wednesday.
Yi Gang, the assistant governor of the People's Bank of China, said the dollar had to continue as key component of the country's 1.4 trillion dollar reserves because it was "the largest currency that we use" in terms of trade and foreign direct investment as well as financial clearances and settlements.
"It is also a very firm policy for China that in our reserves, that the US dollar is the main currency in our reserves and that policy is very firm," he said to a question at a forum in Washington.
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 shift its largely dollar-based reserves toward presently stronger currencies, like the euro, were mere "opinion."
"There is some discussion or comment from maybe scholars, maybe other persons in China in terms of 'there is huge amount of adjustment of reserves.'
"I think that probably is opinion ... if they want to express their opinion, that will be fine, we consider it, we listen (to) it but that does not change our policy," Yi said at a monetary conference organized by Washington-based CATO Institute.
Comments particularly by Cheng Siwei, vice chairman of China's national parliament, that strong currencies ought to be given more weight in the Chinese reserves to offset the losses in weak ones, sent the US dollar into a tailspin last week.
The market chaos led 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," Bernanke said.
Noting that the greenback had been the world's reserve currency since World War II, Paulson said, "I put the US economy up against any in the world in terms of competitiveness."
Before Yi's remarks Wednesday, the dollar fell close to a new record low against the euro in London as weak US retail sales bolstered speculation of another cut in interest rates by the Federal Reserve.
The single European currency was trading at 1.4658 dollars in New York in early afternoon trading Wednesday, against 1.4600 a day earlier. In London Wednesday the euro at one point rose to 1.4725 dollars, just off its record 1.4752, set on November 9.
Yi said 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 it should be proportional to our real economic transactions -- meaning trade, FDI (foreign direct investment) and clearance and settlement."
China's forex reserves, which overtook Japan's for the world's top spot in early 2006 and topped 1.43 trillion dollars in late September, have been boosted especially by the nation's huge trade surplus.
About 70 percent of its foreign reserves is generally believed to be held in US dollar-denominated paper, principally US government bonds.
This has proven a less-than-ideal investment, not just due to the low yields on government debt, but also the weakening of the US currency.
Yi also addressed charges that the Chinese yuan currency was being kept artificially low by Beijing to give Chinese exporters an unfair advantage, saying an undervalued yuan "is not in the interest of China."
"The exchange rate debate is an economic issue and we should do more economic analysis...and we should avoid (attempts) to politicize this issue and to make the matter more difficult," he said.
Fred Hu, managing director for Goldman Sachs (Asia), told the conference that he expected the yuan to be fully convertible in about five years and become a major reserve currency by 2020.
"It is conceivable to me that in about five years, the renminbi (yuan) will be fully convertible on the back of progress they (China) have made in financial reforms, banking reforms in particular, exceptionally strong external sector, export competitiveness, ability to attract foreign capital and the large reserves they have in place," he said.
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