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China not to use forex on oil stockpile
By Chuan Yu (China Daily)
Updated: 2005-09-24 06:49

China has no plans to use its soaring foreign exchange reserves to build up a strategic oil stockpile, a central bank official said on Friday.

Ji Min, financial market division chief of the research bureau of the People's Bank of China, told a forum that the nation's more than US$700 billion forex reserves are still being held exclusively in non-tangible assets, mainly financial assets and portfolio investments.

Some researchers have said China should use part of its forex reserves to buy crude oil, but senior officials have said the current high prices in the international market would make it a bad move.

China's forex reserves expanded rapidly in recent years, largely as a result of its trade surpluses and expectations of local currency revaluation.

The rapid growth has also prompted debate about the necessity of holding forex reserves as large as China's, which are the world's second largest behind Japan.

Sceptics say the reserves, mostly held in United States' treasury bonds and other government bonds, are not being used profitably enough given the relatively low returns on bonds, although others argue that the role of forex reserves is mainly to protect financial security of a nation in stead of making profits.

The faster than desired growth in forex reserves has also frustrated China's central bankers, as they have to increase local money supply, which runs contrary to the strong need to contain inflationary pressures, so as to maintain the floating band of the local currency, or renminbi.

But the nation's unfolding plan to reform its exchange rate system, which aims to improve flexibility, is supposed to be reducing such pressures as it helps dissipate speculation, a strong force driving up forex inflows.

After changing a decade-old exchange rate forming mechanism to one with reference to a currency basket instead of the US dollar two months ago, the Chinese central bank yesterday further broadened the floating band of the renminbi to give banks more flexibility in pricing.

The floating range for renminbi against non-US dollar currencies in the interbank cash market has broadened to 6 per cent from 3 per cent previously.

The renminbi appreciated 2 per cent against the US dollar in the July-21 reform to 8.11 yuan.

(China Daily 09/24/2005 page1)

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