Sat, Jan 07, 2006 - Page 11 News List

China may shift forex reserves' focus away from the US dollar

AFP , BEIJING

China has suggested it may diversify its foreign reserve holdings away from a current heavy focus on the US dollar, although analysts said yesterday Beijing does not intend a major change in policy.

"We will perfect the management of our foreign exchange reserves and actively explore new ways to use our reserve assets even better," State Administration of Foreign Exchange (SAFE) chief Hu Xiaolian (胡曉煉) said in a statement late on Thursday.

"We will further improve the currency and asset structure in the foreign exchange reserve portfolio and continue to broaden the investment channels for our reserves," he said.

The statement, posted on SAFE's Web site, said the diversification would serve the twin purposes of strengthening risk management and boosting the yields of forex reserve assets.

China's foreign exchange reserves, the second-largest in the world after Japan, rose to US$794.2 billion at the end of November, according to previous reports in the state media.

"This is the first time China has come out and said `we're looking at diversification.' It's an important admission," said Callum Henderson, head of foreign exchange strategy at Standard Chartered in Singapore.

"It's also an important message to the US. It's a reminder of who holds the cards in terms of foreign exchange reserves -- not just Japan, but China," he said.

With most of their reserves denominated in US dollars, China and its Asian neighbors now hold the greatest sway ever over the US unit's value.

That makes any decision to lower the US dollar's weight in their holdings important to currency markets.

Ray Attrill, global head of research at 4CAST, said that the SAFE statement, although significant, would probably simply see a continuation of a regionwide policy supporting more diversified portfolios.

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