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Robert K. Landis: Gold is money -- Pass it on
From Bloomberg News Service
Thursday, June 1, 2006
http://www.bloomberg.com/apps/news?pid=10000080&sid=aV75beK4jSeQ
China should use its foreign-currency reserves, the world's largest,
to buy gold and oil as a hedge to guard against the risk of a sudden
drop in the U.S. dollar, said an adviser on the central bank's 13-
member policy board.
The country has 1 percent of its reserves in gold, compared with
more than 70 percent in the U.S., and rising demand may add to gains
in the metal that pushed prices to a 26-year high in May. Booming
exports and investment doubled Chinese reserves to $819 billion in
the past two years, with economists estimating more than two-thirds
of the cash went into U.S. Treasuries.
"China has more than enough foreign-exchange reserves," said Yu
Yongding, who advises on policy as a committee member of the
People's Bank of China. "While they cannot be reduced sharply all at
once, China has decided to take measures to curb their growth rate
and diversify investment of its reserves."
The central bank would likely use new reserves to diversify away
from the dollar and into other assets, rather than shifting current
holdings, he said in an interview in Beijing on May 26. China is the
second-largest foreign investor in U.S. Treasuries.
"We don't want to cause dramatic fluctuations in the foreign-
exchange and securities markets," said Yu, who is also the director
of the Institute of World Economics & Politics at the city's Chinese
Academy of Social Sciences.
China last year attracted more than $60 billion of foreign direct
investment, while its trade surplus tripled to a record $102 billion
in the world's fastest growing major economy.
The country's foreign-exchange holdings as of March 31 surged to
$875.1 billion, up more than $50 billion from end-2005 and
overtaking those of Japan as the world's biggest.
"Central banks will use gold as a fourth currency instead of the
dollar, euro, and yen" to hedge exchange-rate risk, said George
Kapasakis, a senior foreign-exchange trader at Mizuho Corporate Bank
in Sydney. "Gold will be underpinned."
China should follow Singapore's lead in setting up a body to manage
its reserves, said Yu, who spent three months there for a "private"
visit from last December, including a "personal exchange" with
friends at the island's central bank.
Government of Singapore Investment Corp., which handles more than
$100 billion of the city-state's reserves, says it invests worldwide
in equities, fixed-income and money-market securities. It has about
10 percent of its funds in property.
"China needs to establish a separate body to oversee and invest the
reserves to seek higher returns and to avoid losses in case of a big
depreciation in the U.S. dollar," Yu said. "We need to use some of
the reserves to buy other assets such as gold and strategic
resources such as oil."
Gold has rallied about 25 percent this year, reaching $732 an ounce
on May 12, the highest in 26 years.
Foreign reserves have risen in Asia partly because central banks in
countries such as China, Korea, and Taiwan buy dollars to keep
exchange rates stable and protect exporters. The three economies are
among the world's top five holders of reserves.
Finance ministers from the Group of Seven nations said in Washington
April 21 that it is "critical" for governments in Asia, and
particularly China, to let their currencies appreciate to reduce
trade imbalances that threaten global economic growth.
Yu said his government will buy fewer dollars and reduce its
influence over the exchange rate as Chinese exporters learn to cope
with a stronger yuan.
"I think that China's export enterprises are more resilient than we
expected; they will become even more resilient," he said. "Then the
government will intervene less to allow the exchange rate to be
decided more by the market."
The central bank yesterday said in its quarterly policy statement it
will start to withdraw from the currency market, reducing
the "frequency and strength" of its actions. U.S. lawmakers accuse
China of artificially weakening the yuan to fuel an export boom that
has expanded the U.S. trade deficit with the Asian country to a
record for five straight years.
The yuan today rose to 8.0205 per dollar as of 3:30 p.m. in
Shanghai, from 8.0215 yesterday, according to Bloomberg data.
"Yu's comments echo statements in the last monetary policy report
that the People's Bank of China should change its way of thinking
and adopt an innovative approach to achieve a balanced external
account," Qing Wang, a currency strategist at Bank of America, said
in Hong Kong. "They will adopt further measures to facilitate
outflows and ease appreciation pressure."
The People's Bank of China sets daily reference rates for trading
around which its currency is allowed to move, buying and selling the
yuan to keep its value stable.
The Chinese government this year has allowed individuals and
companies to increase investments abroad, and to keep a greater
proportion of their foreign-exchange earnings overseas. The U.S.
trade deficit with China reached $201.6 billion in 2005.
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