Zeng vows to rein in growth of reserves

PUBLISHED : Wednesday, 06 September, 2006, 12:00am
UPDATED : Wednesday, 06 September, 2006, 12:00am

Increasing stockpile adding to upward pressure on yuan, vice-president says

Vice-President Zeng Qinghong has vowed that further measures will be introduced to curb overly fast growth of the country's foreign exchange reserves, which he revealed reached US$954.5 billion at the end of July.

Mr Zeng, writing in an article on the website of the official Study Times, also warned the soaring reserves were adding to the upward pressure on the yuan.

'The foreign exchange reserves reflect China's growing economic power, but on the other hand they have increased exchange rate risks and added to upward pressure on the yuan,' he wrote. 'We will take comprehensive measures to avoid further significant growth in the foreign exchange reserves.'

Mr Zeng's remarks are a rare departure for the vice-president, whose portfolio includes party affairs and overseeing Hong Kong and Macau affairs.

China's foreign reserves, the world's biggest since overtaking Japan's in February, hit US$941.1 billion at the end of June, a 32.4 per cent increase from a year earlier.

The latest figure of US$954.5 billion is a 30.27 per cent year-on-year increase over the US$732.7 billion at the end of July last year.

Beijing revalued the yuan by 2.1 per cent against the US dollar in July last year, partly because of foreign pressure to slow rising exports and reduce the nation's huge trade surplus. The US has claimed the artificially low yuan is the main factor behind the increasing trade imbalance between the two economies.

US politicians have demanded Beijing raise the value of the yuan against the dollar, and Chinese officials have hinted that if pushed too hard they might shift reserves out of US Treasury bonds, which could trigger a global recession.

Beijing has the bulk of its reserves in US Treasury bills - about US$330 billion worth and second only to Japan's US$640 billion.

Mr Zeng said the government should improve its reserves management and consider using them to buy strategic resources and for importing more advanced equipment to upgrade state firms.

He identified rapid growth in the trade surplus as one of the three key problems facing the economy. The others were overly fast growth in capital investment and excessive banking credit.

Many economists suggest the government take steps to slow growth of the reserves, citing the pressures on monetary policy. But a leading government economist yesterday rejected that approach, saying China needed the huge stockpile to fend off market risks.

Pei Changhong , director of the Research Institute of Finance and Trade with the Chinese Academy of Social Sciences, said the stockpile did not pose a threat to the economy, citing low inflationary pressure.

'Considering that China has become a global trade heavyweight, its more than US$900 billion in foreign exchange reserves does not have any obvious negative impact and we should not be alarmed about this,' Mr Pei wrote in the overseas edition of the official People's Daily.