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China cut US dollar reserves last year

China cut the share of its foreign reserves held in US dollar assets last year, suggesting that the US might no longer be able to rely on Asia to finance growing deficits, investment bank Lehman Brothers said in a report this week.

China has the world's second largest foreign currency reserves after Japan, with the equivalent of nearly US$610 billion at the end of last year. The figure rose US$209.9 billion last year, driven in part by a surging trade surplus.

Even as the reserves grew, the share of US dollar assets held by China's central bank fell to 76 percent, down from 82 percent in 2003, Lehman Brothers said.

The bank "is slowly diversifying its FX [foreign-exchange] reserves away from US dollars," said the report, written by London-based analyst Shruti Sood.

The Chinese government won't disclose the composition of its foreign reserves, but acknowledges that most are in US Treasury bills and other dollar assets.

Japanese Prime Minister Junichiro Koizumi and South Korean officials have said their own governments should diversify their foreign currency reserves, reducing reliance on the US dollar.

Combined with those comments, the results of research on Chinese holdings suggests that the US might no longer be able to rely on Asian official financing for its growing current account deficit, the report said.

China's chief foreign exchange regulator said last weekend that Beijing had no plans to change the structure of its reserves on short-term changes in currency values.

"If we sell US dollars now when it is tumbling, it means we lose money," said Guo Shuqing (郭樹清), director of the State Administration of Foreign Exchange.

"If we do sell them, we have to buy other currencies such as the euro. But what if the euro drops?" Guo said.
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