China says to press ahead with FX reserves

BEIJING Wed Jul 27, 2011 11:56pm EDT

BEIJING (Reuters) - China will press ahead with diversification of its $3.2 trillion in foreign exchange reserves, and does not pursue large-scale currency holdings, the State Administration of Foreign Exchange said on Thursday.

"We will continue to diversify the asset allocation of our reserve assets and continue to optimize the holdings based on market conditions," the foreign exchange regulator said in a statement, responding to questions from the public.

The SAFE said the rapid build-up of China's reserves, the world's largest that swelled by $152.8 billion in the second quarter, was "not a direct" cause of inflation, which hit a three-year high of 6.4 percent in June.

The central bank has been using various tools, including the rise in banks' reserve requirement ratios and open market operations to sterilize capital inflows, it added.

"We don't purse large-scale reserves and don't pursue long-term surplus in international balance of payments," the SAFE said in a statement. It added that China needs sufficient reserves to maintain its debt repayment ability to fend off risks and safeguard the country's financial safety.

But as a long-term goal, the country needs to adjust its economic structure and change its economic model, which will "fundamentally" ease capital inflows, the SAFE said.

It seeks to answer some public question about the reserves.

Chinese officials have long pledged to diversify the huge reserves -- as much as 70 percent of which are now in U.S. dollar assets, according to analyst estimates -- but the process has been gradual.

Xia Bin, an adviser to the central bank, told Reuters earlier this month that China should speed up reserve diversification away from dollars to hedge against risks of the U.S. currency's possible long-term decline.

The SAFE pledged to make its reserve investment more transparent but it cautioned against giving too much information to international speculators trying to profit from any changes in China's reserves holdings.

The SAFE also pledged to widen the channel for capital outflows and take gradual steps to make the yuan convertible on the capital account.

(Reporting by Langi Chiang and Kevin Yao; Editing by Jacquelne Wong)

FILED UNDER:

Track China's Leaders