PBoC: China Still (Hearts) US Dollars

♠ Posted by Emmanuel in at 11/16/2007 03:25:00 PM
The People's Bank of China (PBoC) reaffirmed yesterday that the US dollar will "remain the anchor currency" of their country's massive forex reserves to counteract earlier suggestions by Cheng Siwei, vice chairman of the Standing Committee of the National People's Congress, that China should diversify out of the falling dollar. Cheng's statement caused a stir last week in currency markets as traders bid up the euro and sold the dollar in response. This pattern is becoming something of a regularity that I'm wondering if it's planned. First, some official who is not necessarily charged with China's financial affairs bemoans the accumulation of rapidly declining dollars. Then, forex traders make a knee-jerk reaction of selling greenbacks. After a while, the PBoC steps in and says that such statements are mere "opinion." Are the Chinese testing the waters for a large USD sell-off? You never know. From China Daily:
The US dollar will remain the anchor currency of China's massive foreign reserves despite suggestions that the country is too heavily skewed toward the weakening greenback, a senior Chinese central bank official said Wednesday.

Yi Gang, the assistant governor of the People's Bank of China, said the dollar had to continue as key component of the country's 1.4 trillion dollar reserves because it was "the largest currency that we use" in terms of trade and foreign direct investment as well as financial clearances and settlements.

"It is also a very firm policy for China that the US dollar is the main currency in our reserves and that policy is very firm," he said to a question at a forum in Washington.

Yi said recent suggestions that Beijing shift its largely dollar-based reserves toward presently stronger currencies, like the euro, were mere "opinion."

"There is some discussion or comment from maybe scholars, maybe other persons in China in terms of 'there is huge amount of adjustment of reserves.'

"I think that probably is opinion ... if they want to express their opinion, that will be fine, we consider it, we listen (to) it but that does not change our policy," Yi said at a monetary conference organized by Washington-based CATO Institute.

Amid weakening of the dollar, Cheng Siwei, vice chairman of the Standing Committee of the National People's Congress of China, the parliament, said earlier that strong currencies ought to be given more weight in the Chinese reserves to offset the losses in weak ones...

Yi said while the Chinese central bank diversified the major currencies making up its reserves, "the point is the principle for our diversification and the principle that guides us for these reserves is that it should be proportional to our real economic transactions -- meaning trade, FDI (foreign direct investment) and clearance and settlement."

China's forex reserves, which overtook Japan's for the world's top spot in early 2006 and topped US$1.43 trillion in late September, have been boosted especially by the nation's trade surplus.

About 70 percent of its foreign reserves is generally believed to be held in US dollar-denominated paper, principally US government bonds.

This has proven a less-than-ideal investment, not just due to the low yields on government debt, but also the weakening of the US currency.