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Zhou: Divert excess savings to emerging markets

By Zhang Ran (China Daily)
Updated: 2009-07-04 11:30

Zhou Xiaochuan, China's central bank governor, speaks at the Global Think Tank Summit in Beijing, July 3, 2009.

China's excess savings should flow toward developing countries to help correct global imbalances, central bank governor Zhou Xiaochuan said on Friday, indicating the country's resolve to diversify its $2 trillion worth of foreign exchange reserves.

Speaking at the Global Think Tank Summit discussion on the global financial crisis and economic outlook in Beijing, Zhou said, "From a demographic point of view, developing countries will generate tremendous global demand."

The chief of the People's Bank of China said the support of the international financial system, including the international monetary system, was needed to help improve global productivity and income distribution, and drive broader global growth, he said.

Zhou's speech is seen as an indication of China's decision to diversify its $2 trillion foreign exchange reserves and an investment shift from the United States to more developing countries, experts pointed out.

"More residual savings flowing to developing countries will create a win-win situation among developing countries. On the one hand, developing countries can access more funds for economic growth, while on the other hand, China could channel part of its domestic high savings and avoid risks of focusing on investment in dollar assets," Sun Lijian, professor from Fudan University told China Daily.

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About 70 percent of China's foreign exchange reserves are in dollar-denominated assets. The nation is also the largest holder of US Treasury bonds.

China has cut its holdings of US Treasury bonds to $763.5 billion at the end of April, down by $4.4 billion from the previous month's total of $767.9 billion.

The State Administration of Foreign Exchange, which manages the $2 trillion foreign exchange reserve, had expressed willingness to buy as much as $50 billion in bonds issued by the IMF.

The IMF's board of directors has recently approved a bond issue of $150 billion as part of its efforts to seek new sources of funds.

"China could also directly lend loans and provide funds through other channels to developing countries," Sun said.

Speaking at the forum in Beijing, Zhou focused on how the core imbalance - excessive savings in China and excessive consumption in the United States - might be ironed out, or not.

The central bank governor laid out six different scenarios on how the world economy could develop in the coming years. He said the practical way forward is a combination of several scenarios focusing on continued reforms aimed at stronger consumption and significant progress in urbanization in China.

"In this case, given the high savings rate in China, we may still maintain residual savings. If any, I wish this to flow to other developing countries," he said.

"We also want to emphasize that this growth should be green in nature. Furthermore, from a demographic point of view, developing countries will generate tremendous demand for the world," said Zhou.

Zhou said the global imbalances are an important and difficult subject matter; however, while addressing the financial crisis, one cannot afford to ignore the flawed micro-level mechanisms and the importance of regulatory overhaul.

"The causes for the outbreak of this crisis were very complex and were a combination of both macro and micro factors," he said.