US

Forex reserves 'not political weapon'

Updated: 2010-07-08 00:00

BEIJING — China on Wednesday defended the way it invests its massive foreign exchange reserves, saying concerns were unwarranted and it invested the money in a responsible manner.

The comments from the State Administration for Foreign Exchange came in response to a question on whether China’s huge stockpile of foreign currency could be used as an “atomic weapon”.

“Facts have proven that the worries and concerns were definitely unnecessary,” the regulator said on its website.

“We will actively deepen cooperation with countries that welcome our investment. If they have any doubts or worries, we will slow down the pace and enhance communication with an aim to achieve consensus.”

China has the world’s largest foreign exchange reserves, worth $2.447 trillion at the end of March.

The regulator said any adjustment to its huge US Treasury bond holdings was a “normal market operation” and should not be “interpreted politically” – as it tried to allay fears China could use the holdings as a means of retaliation.

China has invested a large portion of its reserves in US dollar assets, such as safe low-yielding US Treasury bonds, but amid the financial crisis has tried to diversify its investments to improve returns.

The nation’s holdings of US debt reached $900.2 billion in April, their highest level since November 2009 and the second consecutive monthly rise, according to a report on international capital flows.

The monthly gain in April and the previous month came after six straight months in which China appeared to reduce its Treasury holdings, or keep them flat, fuelling fears it was diversifying away from US bonds.

The comments from SAFE were part of a series of statements released by the regulator this week in a question-and-answer format, offering a rare glimpse into the way it manages the country’s foreign exchange reserves.

The regulator said gold would not be a key investment for China’s foreign exchange reserves given the poor returns from the precious metal in the past 30 years.

China currently has 1,054 tons of gold and will alter its holdings according to “market conditions”, SAFE said.

While gold bars provided a buffer against inflation, there were other assets that offered similar protection, the regulator said.

Other reasons for limiting investment in gold included the high cost of storing the metal and volatility in international prices, it added.

It also said limited supplies of gold — annual global production stands at 2,400 tons — meant large purchases by China could drive up prices of gold jewellery and other products, hurting domestic consumers.

On Tuesday, SAFE said the country’s foreign exchange reserves would continue to bring reasonable returns and pledged to widen investments to include more emerging nations’ currencies.

 

                                                  AFP