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Major Chinese banks, with an estimated US$80 billion in foreign currency assets, will face losses if the yuan keeps rising in value, bank executives said Wednesday.

 

Banks holding US dollars would "definitely suffer losses as the renminbi, or the yuan, continues to appreciate," Pang Xiusheng, the China Construction Bank's chief finance officer, told Xinhua.

 

The Bank of China (BOC) would pay close attention to the yuan's exchange rate and its effect on financial management, said Zhu Min, a BOC executive assistant president.

 

The number two state lender, listed in Hong Kong and Shanghai, planned to "further reduce" its foreign exchange holdings by the end of the year, Zhu said.

 

The BOC's foreign currency assets, believed to be the biggest among major domestic banks, were a longtime concern for its stock investors, especially with the yuan rising by greater margins lately.

 

Under China's currency controls, banks have been forced to buy the majority of foreign currency earnings by domestic exporters, piling up hefty US dollar and other foreign currency-denominated assets.

 

US manufacturers argue the yuan is undervalued by as much as 40 percent, making Chinese goods cheaper in the United States and American products more expensive in China and hurting the US job market.

 

In July last year, China revalued the yuan by two percent against the US dollar and abandoned its peg to the dollar in favor of a restricted float against a group of foreign currencies.

 

The yuan has since risen by 3.7 percent against the US dollar. Its appreciation was typically sharp last week, rising 123 basis points last Wednesday. On Wednesday, the official exchange rate was at 7.9703 per dollar.

 

A China Banking Regulatory Commission report says as the yuan appreciates, though slowly, banks are finding it increasingly difficult to find foreign currency buyers to hedge risks through currency swaps and other financial tools.

 

(Xinhua News Agency August 23, 2006)