China says it will stop accumulating FX reserves

From Reuters
Tuesday, March 20, 2007

http://www.reuters.com/article/bondsNews/idUSN2035119120070320

GUATEMALA CITY -- China will stop stockpiling its massive foreign exchange reserves, China's central bank governor Zhou Xiaochuan said in an interview published on Tuesday.

"Many people say that foreign exchange reserves in China are (already) large enough," Zhou told the Emerging Markets magazine, whose latest issue was released at a meeting of the Inter-American Development Bank in Guatemala.

"We do not intend to go further and accumulate reserves," Zhou said, adding the government will "cut a small piece of reserves" for a new agency to be set up by China's central bank and finance ministry to manage its massive foreign reserves, which have swollen because of the trade surplus.

He did not say how much money would be passed to the agency.

China's premier, Wen Jiabao, said last week that plans to form a new agency to invest part of the country's swollen foreign exchange reserves, the world's biggest at more than $1 trillion, would not have an adverse impact on the U.S. dollar.

China's central bank also said last week it would not significantly adjust the composition of those reserves. A large part of them are denominated in dollars.

As the reserves have ballooned on the back of China's record trade surpluses, demands have grown for part of the hoard to be invested more aggressively.

Investors have long fretted over Beijing's plans to diversify its foreign exchange investments because of their potential impact on global markets.

Studies have shown investment by China and other Asian countries in U.S. bonds has reduced long-term American interest rates by as much as 2 percentage points.

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