Dollar to remain China's main reserve, central banker says


By Min Zeng
Bloomberg News Service
Wednesday, November 14, 2007

The U.S. dollar will remain the "main currency" in China's $1.43 trillion foreign reserves, said Yi Gang, assistant governor of the People's Bank of China.

The dollar tumbled to a record low on Nov. 7 against a basket of major currencies, including the euro and the yen, after Cheng Siwei, vice chairman of the National People's Congress, said China will invest in stronger currencies when diversifying its foreign reserves.

"The U.S. dollar is the main currency in our reserves and that policy remains very firm," Yi said today at a Cato Institute conference in Washington. "Of course we should diversify. But the proportion of the foreign reserves should be in line with the real economy -- trade, foreign direct investment, clearance, and settlement."

Chinese investors reduced their holdings of U.S. Treasuries by 5 percent to $400 billion in the five months to August, according to Federal Reserve data. China Investment Corp., which manages the nation's $200 billion sovereign wealth fund, said last month it may get more of the nation's reserves to invest to improve returns. China is the second-largest holder of U.S. government debt after Japan.

Concern has increased that if China moves to cut holdings of U.S. government debt, it may push up yields, raising costs for corporate funding and consumer spending, which may dampen an already slowing U.S. economy. About 64 percent of "allocated" global reserves were in the U.S. dollar as of June, according to International Monetary Fund data.

...Yuan appreciation

The Fed's trade-weighted major currency index reached 71.11 on Nov. 7, the lowest level since the gauge debuted in 1971, when U.S. President Richard Nixon decoupled the dollar from gold.

The Chinese yuan has gained 11 percent since the currency link to the U.S. dollar was dropped in July 2005. Officials from U.S., Europe and Canada have said this month the yuan needs to rise at a faster rate to trim China's trade surplus and share in the burden of a weakening dollar.

"In terms of the pace of appreciation, so far it is fine," Yi said. He declined to comment on whether China will revalue the yuan again.

While China's currency has gained 5.1 percent against the dollar this year, it has dropped 5.8 percent against the euro, hurting European exporters. A European Union delegation led by Luxembourg Finance Minister Jean-Claude Juncker and European Central Bank President Jean-Claude Trichet arrives in Beijing in two weeks to make their case for exchange-rate revaluation directly to the Chinese.

"An undervalued renminbi isn't in the interest of China," Yi said. "Let the market be the main force."

...Diversification concern

China's trade surplus rose to a record $27.05 billion in October, an increase of 13.5 percent from a year earlier, the country's customs bureau said Nov. 12. The euro-area trade gap with China widened 25 percent to a record 59.9 billion euros ($87.1 billion) in the seven months through July, according to data released Oct. 18 by the European Union's statistics office.

"China is increasingly seen as out of step with international norms and expectations, as evidenced by the growing number of national leaders and multilateral institutions calling for currency appreciation," U.S. Treasury Secretary Henry Paulson said in New York last week.

A stronger Chinese currency would help narrow the record trade surplus that's bolstering currency reserves and may stoke Inflation as well as property and stock bubbles.

Consumer prices rose 6.5 percent in October from a year earlier, matching the decade high in August, the National Bureau of Statistics said yesterday, after gaining 6.2 percent in September.

The People's Bank of China ordered lenders on Nov. 10 to set aside 13.5 percent of their deposits from Nov. 26, the highest proportion since at least 1987. The central bank has raised borrowing costs five times this year. The benchmark one- year lending rate is at a nine-year high of 7.29 percent.

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