China to keep 'bulk' of forex in dollars

Updated: 2007-06-26 08:50

China, with a record $1.2 trillion of foreign-exchange reserves, will keep the "bulk" of its US dollar holdings because the currency is one of safest investment options, a People's Bank of China assistant governor said.

The dollar remains "important" because trade and foreign direct investment is conducted mostly in the currency, Yi Gang told delegates at a meeting that was closed to the media at the World Economic Forum in Singapore. Asian central banks will continue to hold most of their reserves in dollars, he said.

"Safety, return and liquidity are the three most important elements that people should consider when they talk about reserves," Yi said in a recording of the discussion that was obtained by Bloomberg News.

"As far as we're concerned, the serious reduction of the dollar reserve is a small probability," he said, adding that any adjustments to its dollar holdings will be "incremental."

China's gross domestic product expanded 11.1 percent in the first quarter, making it the world's fastest-growing major economy, led by sustained demand for its exports to the US and other trading partners.

Diversification of the nation's foreign-exchange reserves will be gradual and won't hurt the dollar or financial markets, Market News International said last month, citing Ding Zhijie, one of five advisers to the reserves agency's committee.

'Gradual Process'

China's trade surplus, which the Asian Development Bank estimated will climb by 45 percent to a record $257 billion next year, has sparked calls for further gains in China's yuan.

Some US lawmakers have said that the yuan was undervalued by 40 percent to make China's exports cheap and pledged trade sanctions as punishment.

The central bank expects the yuan exchange rate will gradually move toward a "market-oriented direction," Yi told reporters after the meeting Monday. The currency has risen about 8.6 percent since the dollar link was abandoned in July 2005.

"The central bank of China has the responsibility to keep the exchange rate at more or less a stable level," Yi said. "The mechanism is more toward a market-oriented direction."

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