The country's massive foreign exchange (forex) reserves must directly tap into strategic resources including oil, a senior official from the central bank stated Monday.

The remarks from Sheng Songcheng, president of a provincial branch of the central bank in Shenyang, Liaoning Province, published in the Financial News, a newspaper run by the central bank, are believed to be the government's clearest message thus far that forex reserves will be diversified by investing in resources.

The safety of China's massive forex reserves, mostly consisting of US dollar-based assets, has become a hot issue during the economic crisis. By the end of September last year, the country's forex reserves were the world's largest, totaling $2.27 trillion, according to figures released by China's State Administration of Foreign Exchange.

China's holdings of US Treasury bonds totaled $798.9 billion by the end of October, making China the largest financer of US debt, according to the latest data released by the US Treasury.

Zhao Xijun, deputy director of the School of Finance at People's University of China, echoed Sheng's view, saying that management of China's forex reserve needs to take both sufficient liquidity and safety into consideration.

Fang Fang, vice-chairman of Asia investment banking for JP Morgan, also told the official Xinhua News Agency Sunday that China should boost its strategic resources reserves to hedge against the risks of the devaluation of the dollar.

The country's US dollar assets would likely face losses if inflation occurs in the US, Sheng said. Zhao said China's assets would also lose value if the purchasing power of the US dollar drops.

Though US Federal Reserve Chairman Ben Bernanke stated last month that "inflation could move lower from here," some fear that the US will see inflation in the near future.

Bill Tedford, a fund manager, was quoted by the Wall Street Journal as saying late last month that "inflation is already evident in the consumer-price index and will lurch higher in 2010 and 2011."

The consumer price index (CPI), a main gauge of inflation, rose 0.4 percent in November from October, and over the past 12 months the CPI reading increased 1.8 percent, posting the first positive change year-on-year since February last year, according to data released by the US Bureau of Labor Statistics (BLS). The producer price index, a main measure of inflation at the wholesale level, rose 1.8 percent from the previous month in November, the BLS said.

Sheng, the central bank official, said that investment into resources should be carried out by professional investment firms by purchasing foreign exchange assets from the forex market or the central bank.

But Zhao said he was concerned over whether or not investment firms could handle the purchasing of strategic resources such as oil, which requires in-depth understanding and expertise.

Editor: Xie Fang

Source: china.org.cn