Weak dollar not a concern for China reserves

Updated: 2011-05-04 10:11
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HANOI - China need not worry about the effect of the weakening dollar on its foreign exchange reserves and should not quicken the pace of yuan appreciation because of "temporary" factors, a former deputy foreign exchange regulator said on Tuesday.

China's foreign exchange reserves, the biggest stockpile in the world, surged to $3.05 trillion by the end of the first quarter, heightening long-standing worries about how China can effectively manage the holdings and not become overly exposed to the US dollar.

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The dollar hobbled near a three-year trough against a currency basket on Tuesday, undermined by loose US monetary policy, fanning concerns that it may further erode the value of China's foreign exchange reserves, which have so far been mainly invested in US dollar assets, including US Treasuries.

"It is not necessary for China to worry about the impact of the weakening US dollar on our foreign exchange reserves because we are pushing forward with a strategy of diversifying our investments of foreign reserves," the official, Wei Benhua, said on the sidelines of a regional meeting in Hanoi.

Wei is set to be the director of the new ASEAN+3 Macroeconomic Research Office (AMRO), which will monitor the macro economic policies and financial institutions of the member countries to prevent risks in the region.

He also said that China would not make a one-off currency revaluation or resort to a quicker pace of yuan appreciation to ward off mounting imported inflationary pressure.

"It won't happen simply because of some temporary factors, such as a rising imported inflation, among others," Wei added.

The yuan pulled back slightly against the dollar on Tuesday from a slew of recent record highs, as the People's Bank of China fixed a marginally weaker mid-point, signaling the central bank will stick to gradualism in reforming the country's currency regime.

"We have been emphasizing it all the time that China is sticking to a managed floating foreign exchange rate, which is based on the relationship in the market between supply and demand in reference to a basket of currencies," Wei said.