China affirms gradual diversification of FX reserves

China: US Dollar Important For Reserves; 2010 Key Year

By J.R. Wu, Juan Chen, and Victoria Ruan
Dow Jones Newswires
via The Wall Street Journal
Thursday, December 31, 2009

http://online.wsj.com/article/BT-CO-20091231-700140.html

BEIJING -- The U.S. dollar will continue to be a key reserve currency in the near term and the main asset in China's foreign-exchange reserves, but diversifying the country's reserves "appropriately" will help spread out risk, China's forex regulator said Thursday, reiterating Beijing's currency stance as the year closes.

People's Bank of China Gov. Zhou Xiaochuan also repeated in a new year greeting on the PBOC Web site the central bank will stick to a moderately loose monetary policy, and policy will stay on target but flexible depending on new situations that arise.

"2010 is a critical year for consolidating the economy's stable rebound and overcoming the international financial crisis," Zhou said.

The State Administration of Foreign Exchange said in an overview of the country's foreign-exchange management system China will continue to expand the channels and ways of using its forex reserves, adding that the reserves will be used to promote a stable macroeconomy and the national interest.

China's forex reserves comprise the U.S. dollar, the euro, the Japanese yen, and other currencies, according to the overview posted on SAFE's Web site.

While SAFE didn't offer a further breakdown, it is rare for Chinese authorities to be so explicit about the composition of the country's reserves -- the world's largest at US$2.3 trillion -- though many analysts have said the three major world currencies carry a large weighting in China's reserves.

SAFE said while the U.S. dollar remains the main asset, an appropriate move toward a more stable and diversified structure of the country's foreign-exchange reserves can better meet the demands of external payments and asset allocation, as well as spreading out risk.

The regulator reiterated that making the yuan fully convertible under the capital account is a long-term goal and that China will push forward yuan exchange reform at a measured pace, while keeping the yuan at a reasonable and basically stable level.

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