Business

Tuesday October 24, 2006

China’s forex reserves predicted to hit US$2tril



BEIJING: China should set up a new body to supervise the management of its huge foreign exchange reserves, which are likely to hit US$2tril by the end of 2010, a prominent economist said in remarks published yesterday.

Zhong Wei, deputy editor-in-chief of China Foreign Exchange Magazine, said China needed to make “innovative adjustments” to the management of its reserves, which swelled to US$987.9bil at the end of September.

The stash, the world’s largest, was on track to hit the US$1.5tril mark in the second quarter of 2008, Zhong wrote in the overseas edition of the People’s Daily, the ruling Communist Party’s mouthpiece.

He estimated that China in fact needed reserves of no more than US$800bil.

“The current foreign exchange management regime is extremely unsophisticated and is obviously not suitable for China’s almost US$1tril in reserves,” he wrote.

China has piled up reserves as the central bank, seeking to hold down the yuan, buys most of the dollars generated by a growing trade surplus and inflows of foreign direct investment as well as any inbound speculative capital.

The State Administration of Foreign Exchange, the currency regulator, which comes under the direction of the central bank, is presently responsible for the management of China’s reserves.

China, like most countries, does not disclose how it invests its reserves. Bankers assume that 70% of the reserves are held in dollars that are invested principally in US government and agency bonds.

Zhong said China should set up a financial coordination body to designate government agencies, including the central bank, the foreign exchange regulator and the Ministry of Finance, to handle different tranches of the reserves.

He also suggested that private firms be permitted to help manage the reserves and sharpen China’s skills in this area. – Reuters

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