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- Balance euro, dollar in reserves: adviser
Date: 8-Nov-2007 Sources: (Shenzhen Daily)
THE government should balance the make-up of its US$1.43 trillion stockpile of foreign exchange reserves so strong currencies such as the euro offset weakening currencies such as the U.S. dollar, a senior political figure said yesterday.
The euro hit a high of US$1.4663 following the remarks by Cheng Siwei, vice chairman of the standing committee of the National People's Congress.
'In terms of the structure of our foreign exchange reserves, we should take advantage of the appreciation of strong currencies to offset the depreciation of weak currencies,'Cheng told a financial forum in Beijing.
'For example, in the current foreign reserves structure, I mean the bonds we bought, the euro is appreciating against the yuan while the U.S. dollar is depreciating against the yuan. So we should make a balance between the two,'Cheng added. He said he was speaking in a 'scholarly?capacity, not an official one.
Cheng's position gives him influence in the government, where he holds a rank equivalent to vice premier. However, he does not have real authority over financial matters and has been known to speak on a range of subjects, from the stock market to foreign acquisitions, on which he does not control policy.
Questioned later by reporters, Cheng said: 'I didn't mean we should buy more euros. What I mean is that we should take advantage of the strengthening euro to compensate for weakening currencies.'
He did not elaborate further. The euro fell back to around US$1.4630 following Cheng's second volley of remarks.
China does not disclose the composition of its reserves, but Glenn Maguire, an economist with Societe Generale in Hong Kong, estimated that China holds 65-70 percent of them in dollars and a much smaller share in euros.
In a note to clients, he said Cheng would most probably be familiar with, though not privy to, policy discussions on the exchange rate mechanism and the foreign exchange reserves.
'If China were indeed to balance its foreign exchange reserve holdings between the dollar and the euro, this would represent a massive selling of dollars and buying of euros,'Maguire wrote.
The dollar has weakened significantly against the euro in the past several weeks, following two interest rate cuts by the U.S. Federal Reserve and worries about the economic impact of the meltdown in the subprime mortgage market.
The yuan has risen nearly 9 percent against the dollar since it was revalued by 2.1 percent against the U.S. currency in July 2005 and unpegged to float within managed bands. The euro by contrast has risen 9.2 percent against the yuan over that period.
Cheng said that China would not bow to foreign pressure to let the yuan rise much faster.
He cited the example of the 1985 Plaza Accord, which engineered a sharp rise in the yen Cheng said this ushered in a decade of deflation in Japan, showing that the search for international currency compromises may bring unwanted results.
'Therefore, the exchange rate issue is a sovereign issue, and we must consider it mainly from our own point of view,'he said.
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