Don't rely on a single reserve currency, Chinese central banker says

Section:
From Reuters
Tuesday, June 27, 2006

http://za.today.reuters.com/news/NewsArticle.aspx?
type=businessNews&storyID=2006-06-
27T063934Z_01_ALL723961_RTRIDST_0_OZABS-ECONOMY-CHINA-YUAN-
20060627.XML

BEIJING -- Countries should gradually rely less on the dollar for
trade and their foreign exchange reserves, a Chinese central bank
official said in comments that pushed the dollar down against the
yen.

Analysts say China has been gradually diversifying away from dollar
assets in its foreign exchange reserves, the world's largest, but
fears of a collapse in the U.S. currency will prevent it from making
any dramatic shift.

"Internationally speaking, the situation of over-reliance on a
certain country's currency for international trade, settlements, and
reserve assets should be gradually changed," Wu Xiaoling, deputy
governor of the People's Bank of China, said in remarks reported by
the official Financial News on Tuesday.

Wu did not specifically refer to the dollar by name, but it is the
world's main reserve currency and the one in which the bulk of trade
is conducted.

Analysts said the comments were too general to signify any concrete
change in policy.

"The central bank is not going to give you a hint in terms of
direction of investment before they really do anything, so I don't
read too much into this sort of general remarks," said Qu Hongbin,
economist with HSBC in Hong Kong.

Still, dealers took the comments as a reason to sell the dollar,
whose long-term strength relies partly on central banks' willingness
to stock it as their main reserve currency. It fell by 0308 GMT to
115.95 yen from 116.12 prior to the comments.

Last year central bank chief Zhou Xiaochuan was cited in state media
as urging domestic companies to use non-dollar currencies, such as
euro and Japanese yen, in foreign trade and investment, to reflect
more diverse trading and investment patterns.

Some government economists have said China should convert some of
its foreign exchange reserves, which hit $875.1 billion at the end
of March, into gold to hedge against weakness in the dollar.

Asian central banks have amassed about $2.8 trillion in foreign
exchange stockpiles.

Wu was cited by the paper as saying that Asian countries needed to
hold large amounts of foreign exchange reserves to allow them to
deal with liquidity crises because they could not be assured of
timely help from the international community.

The newspaper also cited Wu as saying a stronger yuan alone could
not correct China's large trade surplus with the United States.

The Sino-U.S. trade gap was the result of global resource allocation
by multinational companies and needed to be addressed through the
combined efforts of the United States and Asian countries, she said.

"Such trade imbalances cannot be resolved simply by adjusting the
exchange rate. It should be mainly resolved by adjusting the
economic structure," Wu was quoted as saying.

China faces pressure, especially from the United States, to allow a
faster rise for the yuan, which critics say is significantly
undervalued, making Chinese exports unfairly competitive.

Beijing revalued the yuan by 2.1 percent and scrapped a dollar peg
for a managed float last July, but the currency has strengthened
only 1.3 percent since.

China reported a trade surplus with the United States last year of
$114.2 billion, while Washington put the figure at $201.6 billion,
largely because it counts goods shipped through Hong Kong as coming
from China.

China has pledged to allow greater flexibility for the yuan over
time, but has stressed that it needs to be careful about the
implications that could have for employment and the country's
financial system.

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