China sees no need to greatly reduce the ratio of US dollars in its foreign exchange holdings although it seeks to diversify its forex reserves in a gradual process, reported China Securities Journal yesterday.
China's forex reserves reached US$1.2 trillion at the end of March and most of the holdings are believed to be US dollar assets, especially US treasury bonds.
In April, China sold US$5.8 billion worth of US treasury bonds, the first drop in its holdings since October 2005, according to the US Treasury Department website. China held US$414 billion worth of US treasury bonds, accounting for 10 percent of the total treasury bonds issued by the US, according to the US Treasury Department.
Some other countries also sold off their US treasury securities in April, according to the department's website.
Data from the International Monetary Fund show that in the first quarter of this year, the ratio of US dollars in global foreign exchange reserves hit the bottom of a decade and more central banks are diversifying their forex investment portfolio by increasing their holdings of euros and pound sterlings.
The price of 10-year US treasury bonds fell to its lowest level in at least five years for fear that China's recent cutbacks in its holdings will trigger a massive sell-off of US treasuries.
China will keep the "bulk" of its US dollar holdings because the currency is one of the safest investment options, said Yi Gang, assistant governor of the People's Bank of China, the country's central bank.
At the World Economic Forum in Singapore, Yi said the US dollar still plays a significant role because trade and foreign direct investment is conducted mostly in the currency. Asian central banks will continue to hold most of their reserves in dollars, he said.
"Safe investment, good return and sound liquidity are the three most important elements that people should consider when they talk about reserves," Yi explained. "As far as China is concerned, the bulk reduction of the dollar reserve is a small probability," he said, adding that any adjustments to its dollar holdings will be "incremental."
As an effort to diversify its forex investment channels, China is establishing a new specialized forex investment company to focus on high-yield investments in bonds, stock markets, real estate and private equities.
Earlier reports believed that China's central bank sold massive US treasury bonds in April to for the establishment of the forex investment company, which may start with US$200 billion in capital.
Analysts said China may not necessarily need to use its US$1.2 trillion in forex reserves as the country now has a trade surplus of about US$20 billion every month, and it plans to issue 1.55 trillion yuan (US$204.07 billion) worth of special bonds to buy forex reserves from the central bank to finance its new overseas investment agency.
Moreover, the US bond sale might be partly conducted by some Chinese banks instead of the central bank, although it's part of its preset strategy to diversify its forex reserve investment portfolio.
In January, China decided that a part of its forex reserves would be diverted to commercial investments with higher yields.
However, Zhao Xijun, finance professor with Renmin University of China, said that the country won't sell US treasuries in a large scale because it's a fairly good choice for investors. "It has better security and liquidity than many other investment options," he said.
The diversification of China's forex reserves will be gradual and won't hurt the dollar or financial markets, commented Ding Zhijie, deputy dean of the Financial Institute of the University of International Business and Economics.
Even if China reduces some of its US treasury holdings, Zhao said, the money may not flow out of the US soil. "It may be shifted to other fields, such as corporate bonds and the stock market."
(China Daily July 4, 2007)
