BIZCHINA / Center

Call to mix forex reserves
(Shanghai Daily)
Updated: 2006-06-26 10:19

China's bulging foreign-exchange reserves and massive holdings in US treasuries are prompting some economists and researchers to argue the nation should diversify part of its huge reserves into gold and oil.

China should consider buying more gold with its forex reserves to avoid any losses linked to possible devaluation of its US dollar-backed assets, two central bank officials said in a latest research note.

Using some of the forex reserves to buy gold could "maintain and raise the value of China's dollar holdings," Zhao Qingming from the central bank's Financial Research Institute and Luo Bin from its accounting department wrote in a note published in China Money Market this month.

Although it was still unclear whether the comment might signal any policy change by the People's Bank of China, the central bank, it has highlighted a growing concern over mounting risks in forex investments.

China has forex reserves of US$875 billion by the end of the first quarter this year, surpassing Japan's as the world's biggest.

The country now invests around 1.3 percent of its forex reserves in gold, or about 600 tons. That compares with 8,500-odd tons owned by the United States, which accounts for more than 70 percent of that country's forex reserves.

China held US$310.9 billion of US Treasuries at the end of last year, up US$88 billion from a year earlier, to be the world's second-largest foreign holder of treasuries after Japan, the central bank said in a report last week.

As the US dollar fluctuates against major currencies and drops in value against the Chinese yuan after China in July scrapped a decade-old peg to the greenback, various nuggets of advice have been voiced that the central bank's investments be diversified.

Economists, including Yu Yongding who advises on policy as a committee member of the central bank, have noted China should use its foreign-currency reserves to buy gold and oil as a hedge to guard against the risk of a sudden drop in the US dollar.


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