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Forex investment in bonds still far away
( 2003-07-08 10:26) (China Daily )

A plan to allow some large Chinese companies to buy overseas bonds with their foreign-exchange holdings was only at a very early stage of consideration, an official with the State Administration of Foreign Exchange said.

"It was not a key issue in our work this year," said the official, who refused to be identified.

Under existing policy, Chinese companies are not allowed to buy overseas bonds with their foreign-exchange holdings, she said.

Media reports have said the plan aims to alleviate the increasing pressure for the yuan's revaluation.

"Policies relating to the plan are likely to be announced within the next few months," one report said.

Niu Li, a senior economist with the State Information Centre, said the government needs to map out such a plan.

"The country has too much reserves of foreign exchange," he said.

By the end of May, the country's foreign-exchange reserves exceeded US$340 billion.

The large amount plays an important role in keeping China safe but it increases the country's financial burden, Niu said.

It also increases the pressure to revalue the yuan, he said.

Wang Zhao, a researcher with the State Council's Development Research Centre, said the plan, if carried out, could help the country reduce the likelihood of inflation.

The government has spent a large amount of domestic currency to buy foreign exchange, Wang said.

"This will further increase the domestic money supply, which has already grown at a fast pace," he said.

The M2 money supply - which includes cash in circulation, deposits and personal savings - was up 20.2 per cent at the end of May from a year earlier.

This was the fastest annual rate in more than five years.

Economist Wang Chuanglian of China Southern Securities said: "There are signs of overheating in some sectors. There has been strong growth in raw-material industries such as steel and energy.

"If the money supply keeps surging, the central bank may step up open-market operations to tighten credit or the government may start taking stronger steps such as raising interest rates."

The People's Bank of China has issued 215 billion yuan (US$25.9 billion) in short-term commercial bills to domestic banks in open-market operations since late April to soak up excess cash in a sign of growing concern about inflationary pressure.

After boosting the money supply to keep the economy growing quickly and to fight the deflation that emerged during the Asian financial crisis of 1997-98, the central bank began tightening credit through the open market a year ago.

It soaked up 246.75 billion yuan (US$29.7 billion) in the second half of last year, compared with an injection of 260 billion yuan (US$31.3 billion) in 1998 and 1999 combined.

China's consumer price index edged up 0.7 per cent in May from the same month last year, leaving it below the 1 per cent threshold that some experts say is where the real threat of inflation begins.

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