IMF: China forex move no cause for concern

Updated: 2007-05-19 20:17

WERDER-HAVEL, Germany - The managing director of the International Monetary Fund said Saturday that he was not concerned about a reported move by China to entrust some of its foreign exchange reserves to a US private equity firm.

The Financial Times reported Saturday that a new company being set up by China to manage a portion of its reserves has entrusted US$3 billion to the Blackstone Group.

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Speaking at a press conference on the sidelines of a meeting of finance ministers from the Group of Eight leading industrialized nations, Rodrigo De Rato said he was not concerned about the impact China's move could have on the US dollar and US Treasury bonds.

"It's rational that emerging economies who have very high levels of reserves diversify their investments," Rato said. "It has happened in other cases, and I don't think we should consider that as extraordinary."

He added that it was particularly in the interest of countries with large foreign-exchange reserves that stability is maintained in currency markets.

The Chinese government said in March that it would create a multibillion-dollar company to invest a portion of its US$1.2 trillion (euro890 billion) in reserves, largely invested in US treasuries, to make more profitable use of the money.

While authorities have not yet revealed details about the new company's size, economists say Beijing might allocate as much as US$200 billion (euro148.4 billion) to US$400 billion (euro296.8 billion) to the venture.

Rato also said that greater currency flexibility was in China's own interests.

"Yesterday's measures are a step in the right direction" because they introduce more flexibility into the exchange rate system, and greater reliance on tightening of monetary policy - key to China's macroeconomic stability, Rato said.

"It would be hard for the Chinese authorities to apply the type of monetary policy they need without a more flexible exchange rate system. If that's not the case, they're at risk of overheating in the Chinese economy, especially in the flow of investment," he added.

China said Friday it would widen the trading band of the yuan against the dollar to half a percent above and below its central parity rate, effective Monday.

It also announced it would raise benchmark deposit and lending rates from Saturday as part of an effort to control rapid credit and investment growth while keeping consumer prices stable and lift banks' reserve requirement ratio by 50 basis points starting June 5.

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