2nd UPDATE: China: To Keep Way Of Managing Forex Reserves

Posted by blog master Friday, January 1, 2010

BEIJING (Dow Jones)--China on Friday sought to reassure the outside world it is taking a conservative approach to managing its massive foreign-exchange reserves, with the government saying it hasn't made big changes to its strategy and the U.S. dollar remains a central asset.

China holds the world's biggest reserves of foreign currency--US$2.27 trillion at the end of September--and so is under intense scrutiny from both global investors concerned about its moves in financial markets and Chinese citizens worried about their nation's wealth.

The statements Friday by a senior regulator, later supplemented by a book published by the State Administration of Foreign Exchange, seem intended to reassure investors that Beijing isn't selling its vast holdings of U.S. Treasurys, despite worries the dollar is likely to depreciate in the future.

"The composition remains as it was before. There is no major change" in the reserves, said Wang Xiaoyi, vice director of SAFE, which oversees the reserves.

"We are not making any big adjustments in direction. Our operations are still as usual, meaning they follow the existing forex reserves management goal," he said Friday on the sidelines of an economic forum in Beijing.

China has repeatedly said it follows the principles of keeping the reserves safe and liquid, as well as increasing the value of the reserves.

Hours later, SAFE posted a Chinese-language book about foreign-exchange issues on its Web site. The normally publicity-shy organization said the unusual move was an attempt to increase transparency on how it manages its foreign-currency holdings.

"A stable, diversified structure of currencies, with the U.S. dollar as the main component but with some appropriate diversification, is able to meet our needs of external payments and asset allocation," SAFE said in a chapter of the book on reserve management. It didn't give any precise details on how China's reserves are invested.

With the dollar's sharp slide in recent months, academics and officials outside SAFE have stepped up calls for more diversification of the reserves into other investments such as gold and commodities. But SAFE stressed in the book it is inappropriate to invest a large portion of the reserves in volatile and illiquid assets.

"The forex reserves must maintain enough liquidity," it said in the book. "Not only must they satisfy the usual demands of external payments, such as importing necessary materials and technology and encouraging companies to expand abroad, they must also play the role of ensuring the nation's financial security when there may be rapid capital outflows and the currency comes under heavy pressure."

Senior Chinese officials, including Premier Wen Jiabao, have repeatedly expressed concern about the dollar this year. China, which holds most of its forex reserves in dollar assets, worries massive U.S. government borrowing could eventually result in inflation, hurting the value of China's holdings.

Wang acknowledged recent declines in the dollar, saying the "depreciation of the U.S. dollar is a long-term trend." In the near term, however, the dollar's key role as the global reserve currency won't change, SAFE said in the book, which repeated views senior officials have expressed in the past.

The size of China's reserves continues to build, with the central bank intervening to hold down the value of the currency. Wang told Dow Jones Newswires that China's forex reserves expanded monthly in November and October from the prior month. Official reserve data are only available until end-September.
source-http://online.wsj.com