China in need of huge forex reserves - economist
Updated: 2006-09-05 14:04

BEIJING - China's huge stockpile of foreign exchange reserves is necessary to fend off market risks, a government economist said in remarks published on Tuesday, adding that they were not inflationary and posed little threat to the country's economy.

China's foreign exchange reserves, the world's largest, rose to $954.5 billion at the end of July, state media said on Monday, citing Vice-President Zeng Qinghong.

Many government economists contend that Beijing should seek to slow growth in its reserves, citing the pressures it has put on monetary policy.

The central bank, in an effort to keep yuan levels steady, buys many of the dollars generated by the country's large trade surplus and inflows of foreign direct investment.

Pei Changhong, a researcher with the Chinese Academy of Social Sciences, a top government think-tank, said China needed abundant reserves to import energy and other raw materials, support Chinese firms investing overseas, pay its foreign debts and allow foreign investors to repatriate dividends.

"Considering that China has become a global trade heavyweight, its more than $900 billion in foreign exchange reserves does not have any obvious negative impact and we should not be alarmed at this," Pei wrote in the overseas edition of the official People's Daily.

Pei explained that although the rapid build-up in China's forex reserves posed challenges to monetary policy, it did not generate any significant inflationary pressure and was therefore of no big concern.

He said that although it is commonly considered appropriate for a country's reserves to equal three to six months' worth of imports, China, as a large developing country, needed more.

He did not spelling out what level of reserves he thought would be suitable.

State media on Monday cited Zeng as saying that China would do more to slow growth in its forex reserves and widen the uses of the money.