Tue, Sep 13, 2005 page11

• PRC backs stable global market

  • AFP
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  China's central bank chief Zhou Xiaochuan (周小川) has vowed that the bank will not initiate any moves in the management of its considerable foreign exchange reserves that could trigger market volatility.

  Zhou said the People's Bank of China will not take any action adjusting the composition of its hard currency holdings, suggesting that fears in the market that China may sell down some of its US dollar holdings are unfounded.

  "We do not want to take any initiative in our foreign exchange reserve weightings that would trigger turbulence in ... financial markets," he said in remarks posted on the bank's Web site yesterday. "We will not take any incautious action in terms of this aspect."

  Zhou's remarks were made during a business conference in the Canadian city of Calgary.

  There have been concerns that the central bank's discomfort with the US twin budget and current deficits and the dollar's slide against the euro and the yen could lead to a reweighting away from the US unit. That would hasten the dollar's slide.

  Zhou's remarks echo soothing statements made by the Chinese central bank's assistant governor, Ma Delun (馬德倫), last week.

  But all eyes are on Asia, where central banks are sitting on well over US$2 trillion in foreign exchange reserves.

  China held US$711 billion of reserves at the end of June, although this number is believed to have expanded since then.

  Standard Chartered Bank estimates that China's reserves are climbing by US$1 billion to US$2 billion every working day and that it will exceed Japan as the world's largest holder of foreign exchange by the second quarter of next year.

  There are also concerns that China will follow the diversification path taken by Russia, whose central bank announced in April that it was increasing its holding of euros to 30 percent from 20 percent at the expense of the US dollar.

  Although China's foreign exchange holdings have grown dramatically in recent years on the back of increasing exports, foreign investment and yuan speculation, Zhou said that recent currency reforms will lead to a slowdown in hard currency accumulation.

  "After the exchange rate mechanism reforms, the central bank will reduce foreign exchange purchases in the market to allow companies to hold more foreign currency. There will also be more private investment in US dollars, euros and yen," he said.

  China scrapped its yuan-dollar peg at the end of July and introduced a carefully managed currency basket as a reference to determine the yuan's valuation.

  At the same time, the government revalued the yuan by 2.1 percent against the US dollar, a move that was interpreted by the market as the first in a series of steps to strengthen the currency.

  Since then, the yuan has barely budged against the dollar, closing at 8.0924 yesterday compared to 8.11 on July 21.

  Zhou reiterated that the eventual goal is for a fully floating currency but said that the government is pursuing a gradualist approach to yuan reform.

  "The gradual approach is suitable for exchange rate reform as we're not just changing the mechanism but also a mindset," he said. "After the new mechanism has been reformed there should be a period for people to learn and adapt."

  Zhou said efforts to speed the process up by force were unlikely to succeed, singling out Charles Schumer and Lindsey Graham, two US senators leading the charge against China's currency policy.
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