Economist: Cut dollar share of forex reserves
(Reuters)
Updated: 2006-02-27 16:38

China should reduce the dollar share of its foreign exchange reserves because of the risks posed by the instability of the U.S. currency, influential economics professor Xiao Zhuoji said in an interview published on Monday.

Speaking to the Shanghai Securities News, Xiao also proposed a number of ways to slow the explosive growth in China's reserves, which rose 34 percent last year to $818.9 billion.

"Dollars account for most of our reserves, and the instability of the dollar increases foreign exchange risk. So we should take measures to cool down this extraordinary reserve growth," the paper quoted Xiao as saying.

He proposed adjusting the structure of China's reserves to reduce currency risk but did not elaborate.

Xiao is a Peking University professor and a member of the standing committee of the Chinese People's Political Consultative Conference, a body that advises the National People's Congress, or parliament.

The congress convenes on Sunday for its annual session.

"The rise in foreign reserves demonstrates the strength of China's economy. But the extraordinary growth has also had some negative impact and brought with it foreign exchange rate risk," Xiao told the paper.

For one thing, the yuan issued by the central bank when it buys dollars flooding into China could fuel a new burst of fixed-asset investment, making it harder to control the economy.

China could slow reserve growth by strictly controlling capital inflows and speeding up exchange rate reform, he said.

For example, companies could be allowed to hold more foreign exchange, instead of being required to sell it to the central bank, and Chinese could be permitted to invest in foreign currencies.

Xiao also said China could also cut its trade surplus, which tripled last year to $102 billion, by reducing resource-intensive exports and importing more high-tech products.