Mon, Nov 12, 2007 page11

• US brushes off China reserve diversification hints

  • AFP
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  Amid a plunging US dollar, China has again threatened to diversify its mountain of dollar foreign reserves but US officials are unperturbed while experts do not see a rapid shift by Beijing.

  A senior politician as well as a state banker in China last week both underscored the need for Beijing to shift part of its US$1.4 trillion in reserves toward presently stronger currencies, such as the euro.

  Comments particularly by Cheng Siwei (成思危), vice chairman of the National People's Congress, that strong currencies ought to be given more weight in the Chinese reserves to offset the losses in weak ones, sent the greenback into a tailspin.

  While China plans to gradually decrease its relative reliance on the greenback as a backstop currency, it is unlikely to do it in a rapid fashion, analysts say.

  "Beijing is not about to shoot itself in the foot by carrying out a mass sell-off of greenbacks," Stratfor, a private US intelligence firm, said in a bulletin to clients.

  SLOWDOWN

  Such a move would wipe out much of China's foreign reserves "in less than the blink of an eye", it said, adding that Beijing wanted "just to slow or stop its purchase of new batches" of the greenback.

  But the most recent Chinese suggestions do point to imminent changes in Beijing's method of currency reserve management -- changes being discussed in top Chinese political circles -- such as investing in assets with higher rates of return, like the euro or other investment instruments such as equity or energy assets, Stratfor said.

  To date, only US$200 billion to US$400 billion of China's foreign currency reserves have been designated for spending elsewhere -- notably below the US$650 billion threshold suggested in March.

  US financial and economic czars were unperturbed by the latest reports on Beijing's reserves diversification plans, underlining the dollar's status as the dominant reserve asset and traditional safe-haven currency.

  Cheng's remarks sent tongues wagging in the US Congress, which has often been critical of Beijing's refusal to make its yuan currency more flexible.

  At a congressional hearing on the US economic outlook, US Federal Reserve Chairman Ben Bernanke was asked to comment on the reports of Beijing reserves switch from the dollar.

  "How worried are you about that? How likely is it to occur? How much credibility do you give this statement that was made yesterday?" asked Senator Chuck Schumer, a proponent of sanctions on Beijing if it does not make the yuan more flexible.

  BERNANKE'S VIEW

  Bernanke said, "I'm not particularly concerned about any major change in the [reserves] holdings of China or any other country."

  He noted however that "sovereign wealth funds" -- investment vehicles funded by a country's foreign reserves -- and "portions of reserve accumulations" were reviewing their bets across currencies for higher returns.

  "But again, I don't see any significant change in the broad holdings of dollars around the country -- around the world. Dollars remain the dominant reserve asset and I expect that to continue to be the case," Bernanke said.

  PAULSON WEIGHS IN

  US Secretary of the Treasury Henry Paulson also defended the dollar's position.

  It has been the world's reserve currency since World War II and "there's a reason," he said.

  "I put the US economy up against any in the world in terms of competitiveness," he said.

  Statements from Chinese officials that their currency reserves were too heavily skewed toward the dollar are not new.

  Three months ago, when US lawmakers threatened sanctions against China over the yuan issue, reports said Beijing hinted using a "nuclear option" -- unloading its US dollar denominated assets to sink the greenback.

  US President George W. Bush cast doubt on the reports but responded that "it would be foolhardy for them to do this" and that such a move would be more detrimental to China than the US.

  Bush was confident the US and China could resolve any of their differences "in a cordial way."
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