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Buy oil with FX cash, China central bank official urges

Section: Daily Dispatches

From Dow Jones Newswires
via The Wall Street Journal
Sunday, January 3, 2010

BEIJING -- China should set up a special entity to buy oil and other strategically important resources using funds from the country's foreign-exchange reserves, the central bank-run Financial News reported Monday, citing Sheng Songcheng, head of the Shenyang branch of the People's Bank of China.

Such an entity could buy foreign exchange from the central bank or on the foreign-exchange market, Sheng wrote in a commentary in the newspaper.

China's forex reserves, the world's largest, reached US$2.27 trillion at the end of September, with the majority of the assets denominated in U.S. dollars. China worries that a depreciation of the dollar would erode the value of these holdings, especially after Washington's efforts to prop up the U.S. economy with a near-zero interest rate and massive deficit spending kept the dollar weak for much of 2009.

However, Sheng said the yuan's exchange rate to the dollar doesn't directly determine the value of China's forex reserves. He said the value of the forex reserves is more closely linked to the dollar's actual purchasing power and the rate of inflation in the U.S.

He also said while an increase in China's forex reserves would add to the appreciation pressure on the yuan, such an increase may not necessarily result in the yuan rising because the currency's value is determined by many other factors. He didn't elaborate.

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