China will diversify its $1 trillion foreign
exchange reserves, the largest in the world, across different currencies and
investment instruments, including in emerging markets, Chinese central bank
governor Zhou Xiaochuan said on Friday.
His remarks sent the dollar tumbling for a second day and fueled a growing
debate about how China should best use its fast-growing reserves, which are
about 70 percent in U.S. debt securities, bankers estimate.
"(Diversification) includes currencies, investment instruments, including
emerging markets," Zhou told Reuters on Friday on the sidelines of a monetary
Asked about selling U.S. dollars, he said: "We do not have any new
preparations for selling any currencies." He said gold sales were not under
Changes in China's massive stockpile of money are being closely watched
because it could ripple through financial markets worldwide, risking a steep
dollar fall if U.S. debt floods onto the market, which could push up U.S.
interest rates and slow global growth.
These fears caused the U.S. dollar to hit a 2-1/2 month low against the euro,
while gold prices rose to fresh two-month highs but emerging market debt was
In comments published on Friday, Chinese researchers said the country's huge
pile of reserves was a double-edged sword. On the one hand it increased foreign
confidence in China's economic stability and laid the foundation for China to
make the yuan fully convertible in future.
On the other hand the reserves symbolized China's growing economic
imbalances, including a record trade surplus, and so helped spark friction with
its main trading partners.
It also exposed China to more market risks, generated upward pressure on the
yuan, raised the risk of inflation and made it harder for the central bank to
conduct monetary policy, they said.
"China now faces a dilemma. It either keeps the exchange rate stable or
sacrifices sound economic growth," Dou Erxiang, a researcher at Peking
University, told the official newspaper Financial News.