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SAFE: Country not reducing US dollar holdings
By Zhang Dingmin (China Daily)
Updated: 2004-12-10 00:37

China refuted rumours on Friday that it had been dumping US dollar-denominated assets from its massive foreign exchange reserves.

The rebuttal by the nation's forex regulator was a direct response to recent reports in overseas media that the nation was reducing US dollar holdings due to the greenback's persistent slide.

"Those reports were sheerly groundless," said a spokesman for the State Administration of Foreign Exchange (SAFE).

"China is a highly responsible investor in the international market," he continued. "China has always been protective of the security and stability of the international market on a voluntary basis, and will never participate in exchange rate speculative trading."

The currency allocation of China's forex reserves is based on factors such as the needs of its economic growth, foreign trade payments, foreign debt structure as well as capital market conditions.

"We pay a lot of attention to the tendencies of the international foreign exchange market, but will not adjust our currency mix to follow short-term market fluctuations," the spokesman said.

The US dollar slide substantially against major currencies in recent months. It has depreciated 30-40 per cent against the euro and 10-20 per cent against the Japanese yen since 2002.

The dollar's depreciation has also prompted worries that it had subsequently resulted in huge losses to China's forex reserves, which SAFE also dismissed.

China's forex reserves jumped by 27 per cent in the first three quarters of this year to US$514.5 billion. Sixty to seventy per cent of the money is commonly estimated to be held in US dollar-denominated assets.

China has developed a relatively mature mechanism to manage its forex reserves under the principles of "safety, liquidity and appreciation," and exchange rate changes will not result in any real gains or losses until currency conversion occurs, the SAFE spokesman said.

The Chinese Government has fully considered its external payment needs when deciding the currency mix of its forex reserves, he said. "So there is not such a possibility that China converts US dollars into other currencies due to a lack of real payment methods, and therefore incur conversion losses."

In sharp contrast to the 1980s and early 1990s when China's foreign exchange incomes were tightly controlled as a rare resource, the rapid increase in forex reserves in recent years have led to growing speculation among some economists over the need to keep such a large pool of foreign exchange.

But the SAFE spokesman refuted that point of view on Friday, saying the ultimate goal of holding forex reserves is to safeguard a nation's macroeconomic stability, maintain the credibility of the government and its enterprises, as well as boost international confidence in the Chinese economy and currency.

"There is certain cost to holding forex reserves," he said. "But in the event of turmoil or crisis in the economy or entire financial system, the nation will suffer costs that are tens or hundreds of times as much."

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