China's reserves reach trillion; premier promises to start spending

From Xinhua News Agency
via China Daily, Beijing
Sunday, January 21, 2007

http://www.chinadaily.com.cn/bizchina/2007-01/21/content_788400.htm

Chinese Premier Wen Jiabao said that China would steadily push forward the foreign exchange rates reform and actively explore and expand the use of its US$1.06-trillion foreign exchange reserves.

China would strengthen operation and management of foreign exchange reserves and facilitate the balance of international payment, said Wen at the two-day Third National Financial Work Conference.

The closed-door meeting was designed to chart the course of China's financial sector.

On Monday, the People's Bank of China, or central bank, announced that its foreign reserves, already the world's largest, hit US$1.0663 trillion at the end of last year, up US$247.3 billion from the end of 2005.

China's foreign exchange reserves have been increasing rapidly on the back of a surging trade surplus and rising foreign direct investment.

Analysts claim that the US$1.06-trillion reserve could buy Microsoft, Citibank, and ExxonMobil Corp. as well as General Motors and Ford.

At present, the State Administration of Foreign Exchange is in charge of investing much of China's foreign exchange reserves, mainly in US treasury bonds and other high-quality assets.

The fast accumulation of foreign reserves is an indication of China's growing economic strength, but it has also put China under more pressure from trading partners to appreciate the yuan faster and face increase trade friction, said Prof Zhang Liqing with the Central University of Finance and Economics.

As foreign reserves rise, there are calls for using part of the money to purchase advanced technologies and equipment, to replenish social security fund, or to develop social undertakings of education, medical care, and environmental protection.

But such suggestions fail to understand the fact that China's foreign reserves keep increasing as the central bank buys massive amounts of dollars in the open market to only allow gradual yuan appreciation, analysts say.

"The foreign reserves are not treasury capital, but liabilities of the central bank, which means they cannot be used wishfully," said Prof. Zhao Xijun with the People's University.

China needs foreign exchanges to meet its payment requirement for import and export. Apart from that, the surplus should be best allocated and invested to achieve highest returns, said Lin Yifu, a renowned economist from Peking University's China Center for Economic Research.

He stressed that any use of foreign reserves have to be fully discussed and carried out in a very prudent way.

"To actively explore and expand channels of using foreign reserves will be a major point in future work," he said.

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