China will diversify mainly with new dollars, not old ones

From China Daily, Beijing
via Xinhuanet.com
Friday, May 11, 2007

http://news.xinhuanet.com/english/2007-05/11/content_6083732.htm

BEIJING -- The central bank said yesterday that the country will not sell large amounts of U.S. dollar-denominated assets to diversify its foreign exchange reserves.

The People's Bank of China also warned of a risk of rising inflation and a rebound in investment as the economy steamed ahead in the first quarter, growing by 11.1 percent year on year.

Authorities have said the country will diversify part of its foreign exchange reserves, which amounted to $1.02 trillion by the end of March and are believed to be invested mainly in dollar bonds.

The central bank said it will mainly address the issue of newly added reserves by widening the foreign currency investment channel and reaffirmed the importance of its U.S. dollar-denominated assets. They will remain an important part of China's outbound investment, the bank said in its monetary policy report for the first quarter, which was published on its website yesterday.

The bank also said it would keep the yuan basically stable at a reasonable level.

The bank warned in the report that the country faced the risk of inflation and of a rebound in investment, and that it must prevent the economy from overheating.

In the first quarter, urban fixed asset investment grew by 25.3 percent year on year, 0.9 percentage points faster than in the first two months. Meanwhile, the consumer price index rose by 2.7 percent year on year, but in March the index grew by 3.3 percent, bypassing the alarm level of 3 percent set by the central bank.

In another development, the State Administration of Foreign Exchange (SAFE) announced yesterday that the country's current account surplus hit $249.9 billion last year, an increase of 55 percent over the 2005 level of $160.8 billion.

The jump came mainly from the increase in the trade of goods, which reached $217.7 billion, up 62 percent year on year, the foreign exchange regulator said on its website.

The surplus in the country's capital and financial account reached $10 billion, down 84 percent. The SAFE attributed the fall to the strong growth in outbound securities investment.

It gave no figures for last year's overall balance of payments surplus.

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