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Gold''s rising price pushes Hong Kong jewellery makers to silver

Section: Daily Dispatches

From AFX News
via Forbes.com

Thursday, April 27, 2006

http://www.forbes.com/business/feeds/afx/2006/04/27/afx2701304.html

BEIJING -- China's growing foreign exchange reserves, which are
likely to hit $1 trillion this year, face huge risks from a possible
US dollar decline and China has to take urgent measures, a Chinese
central bank monetary committee member said.

Yu Yongding, the only non-government member of the committee and an
economist with the Chinese Academy of Social Sciences, was cited by
the China Business News as saying that China's current management of
the foreign exchange reserves, by investing heavily in US
treasuries, is neither profitable nor safe.

"A large amount of China's foreign exchange reserves is in the form
of US dollar assets, and any US dollar depreciation or US economy
inflation could result in losses for China. We have to make
preparations for that possibility as quickly as possible as a way to
avoid such a bad scenario," said Yu.

In addition, Yu said China's heavy investment into US dollar
treasuries is actually providing cheap funds for overseas investors,
thus allowing foreign investors to have enough capital to re-invest
in China.

"We are actually exporting capital to fulfill the saving-investment
gap in the US, and we are sacrificing lucrative investment returns
for low-yielding returns in US treasury bonds," said Yu.

Yu acknowledged that the excessive foreign exchange reserve growth
is adding pressure on the yuan to appreciate, but he added the
government is reluctant to see a sharp yuan appreciation because
this could hurt China's exports sector, including that of the
textile industry.

"The yuan will be allowed to appreciate, but in a gradual manner,"
Yu said.

Yu said the People's Bank of China has to issue huge amounts of yuan
to buy foreign exchange, and the central bank is forced to issue
massive treasuries bills to soak up the excess liquidity. Otherwise,
the money could flow into industrial sectors to make China's already
sizzling economy even hotter.

But Yu added the current operations of the PBOC, mainly issuing
treasury bills, are not sustainable because commercial banks would
finally give up the low-yield central bank bills.

"In my view, the liquidity soaking-up policy can't be continued
forever because current operations will hurt bank profitability in
the long term," said Yu.

Yu has been making similar comments on the PBOC's reserve policy
since late last year.

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