China reserves move to hit dollar?

Friday 26 January 2007 20.43
China - Currency switch signal
China - Currency switch signal

China has suggested it may diversify its foreign reserve holdings away from a current heavy focus on the US dollar.

'We will perfect the management of our foreign exchange reserves and actively explore new ways to use our reserve assets even better,' State Administration of Foreign Exchange (SAFE) chief Hu Xiaolian said in a statement late last night.

'We will further improve the currency and asset structure in the foreign exchange reserve portfolio and continue to broaden the investment channels for our reserves,' he added.

The statement, posted on SAFE's website, said the diversification would serve the twin purposes of strengthening risk management and boosting the yields of currency reserve assets.

China's foreign exchange reserves, the second largest in the world after Japan, rose to $794.2 billion at the end of November, according to previous reports. Some economists estimate they will soon be even bigger than Japan's by the end of this year.

With most of their reserves denominated in dollars, China and its Asian neighbours now hold the greatest sway ever over the US dollar's value. That makes any decision to lower the dollar's weight in their holdings important to currency markets.

US Treasury Secretary John Snow said on Thursday that it was not in China's interests to make any major sudden moves that would see the value of the dollar plummet. 'Remember, people who own US securities have an interest in seeing that paper, whether it's equities or debt paper, sustain its value,' Snow said.