Economist asks Chinese govt to put a cap on forex reserves

I / Beijing April 1, 2010, 12:27 IST

A Chinese economist has called on the government to put a $800 billion ceiling on the burgeoning forex reserves and invest the rest of the current over $2 trillion in overseas investments to diversify from huge investment in the US Treasury bonds.

"The country should diversify its currency portfolio for foreign exchange reserves and reduce the share of US dollar- dominated assets for risk control purposes," former Vice-Chairman of standing committee of the National People's Congress, Cheng Siwei said at Fudan University yesterday.

China's foreign exchange reserves, the world's largest, climbed $453 billion in 2009 to $2.4 trillion.

China is also the largest owner of the US Treasury securities and held $889 billion of the securities by the end of January this year after scaling it down from $894.8 billion in December 2009.

Yi Gang, head of the State Administration of Foreign Exchange, said the country's diversified allocation for foreign exchange reserves mainly include the US dollar, the euro, and the Japanese yen, without providing the currency composition of the holdings.

However, analysts maintain that over 70 per cent of the forex reserves are in the US dollar-denominated securities.

"We could maintain the scale of forex reserves by increasing the overseas purchasing volumes to slash the trade surplus, and also spur more direct investment abroad," Cheng was quoted as saying by the official China Daily.

Talking about mounting pressure from countries like the United States on yuan appreciation, Cheng said, China should keep the yuan exchange rate "basically stable at reasonable levels" but with more flexibility.

"Don't make the valuation of the Chinese currency too political, the rate fluctuation will directly impact the global trade framework and impede the progress of the global economic recovery," he said.