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Mon, Nov 06, 2006 - Page 10 News List

Chinese economists call for reserve diversification

HEADACHE China's huge reserve stockpile is proving an obstacle to effective monetary policy and pressuring the yuan higher, both local and foreign economists say

AFP , SHANGHAI

A growing chorus of Chinese economists and policymakers are calling for diversification of Beijing's bulging foreign exchange coffers, which are expected to top US$1 trillion this month.

Zhao Xijun (趙錫軍), a finance professor at Beijing's People's University, said that China can use its reserves to import "high-tech products and strategic natural resources."

China should also invest its massive holdings in the stocks of foreign companies, and inject capital into China's under-funded social welfare system, Zhao was quoted by the People's Daily as saying.

His was the latest voice in the heated debate among Chinese academics and government advisors on how Beijing should manage its soaring foreign exchange reserves.

The reserves hit US$987.9 billion at the end of September and have been expanding at a rate of US$18.8 billion a month this year.

At the end of 2000 China's foreign exchange reserves stood at US$165.6 billion.

Experts worry that China could suffer huge losses if the dollar depreciates or US treasury yields fall, as dollar-denominated assets are by far the largest portion of the reserve portfolio.

According to Brad Setser, head of research at Roubini Global Economics in New York, China's reserves constitute about 70 percent in dollar assets.

China's huge reserve stockpile is proving an obstacle to effective monetary policy and pressuring the yuan higher, economists say.

Some academics have suggested that China should spend some of the cash on other financial instruments such as bonds, or physical investments like gold.

"If we use the forex to buy gold and other things it's feasible, but I don't think the Chinese government has the ability to do this since it requires the specialized knowledge," said Ha Jiming (哈繼銘), chief economist with China International Capital Corporation based in Hong Kong.

China's foreign exchange holdings are so huge that shifting even one percent of US$1 trillion will spook the markets, Ha said.

Some economists have suggested spending the money domestically, but that raises the problem of having to convert the foreign currency back into yuan.

"This is not really money that you can use for that sort of purpose otherwise your monetary policy just goes out the window," said Stephen Green, an economist at Standard Chartered in Shanghai.

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