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Gold gains on speculation that central banks could turn buyers
By Geoff Dyer and Andrew Balls
Financial Times, London
Thursday, January 5, 2006
http://news.ft.com/cms/s/f39fa8e4-7e25-11da-8ef9-0000779e2340.html
China indicated on Thursday it could begin to diversify its rapidly
growing foreign exchange reserves away from the US dollar and
government bonds -- a potential shift with significant implications
for global financial and commodity markets.
Economists estimate that more that 70 per cent of the reserves are
invested in US dollar assets, which has helped to sustain the recent
large US deficits. If China were to stop acquiring such a large
proportion of dollars with its reserves -- currently accumulating at
about $15bn (12.4bn) a month -- it could put heavy downward
pressure on the greenback.
In a brief statement on its website, the government's foreign
exchange regulator said one of its targets for 2006 was to "improve
the operation and management of foreign exchange reserves and to
actively explore more effective ways to utilise reserve assets."
It went on: "[The objective is] to improve the currency structure
and asset structure of our foreign exchange reserves, and to
continue to expand the investment area of reserves.
"We want to ensure that the use of foreign exchange reserves
supports a national strategy, an open economy and the macro-economic
adjustment."
The announcement came from the State Administration of Foreign
Exchange (Safe). It gave no more details about whether this meant a
big shift in the investment strategy for Chinese reserves, which
according to local press reports reached nearly $800bn at the end of
last year and are expected by economists to near $1,000bn this year.
The regulator also said it would end quotas on the amount of foreign
currency Chinese companies can acquire to invest in overseas assets,
a decision that removes a bureaucratic hurdle facing companies that
plan to make international acquisitions.
The statement comes at a time of growing debate in China on how the
reserves are invested. Some economists have called on Beijing to use
the funds to finance infrastructure investment and clean up state-
owned companies, or to invest in higher-yielding assets rather than
financing US borrowing.
However, according to Stephen Green, economist for Standard
Chartered in Shanghai, although the language was "vague," Thursday's
statement was the first time Safe has publicly indicated a shift
away from dollar assets.
"It is a subtle but clear signal that they are interested in moving
away from the US dollar into other currencies, and are interested in
setting up some kind of strategic commodity fund, maybe just for
oil, but maybe for other commodities," he said.
The Group of Seven leading industrialised economies has repeatedly
called for an adjustment in global trade imbalances, including a
rise in the renminbi. The US has expressed frustration that China
has not allowed its currency to rise significantly after last July's
2 per cent revaluation. That saw China move from a dollar peg to
managing its currency against a basket of currencies, potentially
allowing the renminbi to rise against the dollar.
John Snow, US Treasury secretary, speaking earlier on Thursday,
repeated his call for China to allow the renminbi to rise against
the dollar. "The trade deficit is influenced by lots of things,
differential growth rates, differential savings rates and investment
rates and so on. But clearly, getting the [Chinese currency] more
appropriately valued will be helpful to the global adjustment
process," he said.
However, some economists believe it would be a mistake for China to
shift its reserves into domestic investment or other asset classes.
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