Economist: Forex reserves much too big
(AFP)
Updated: 2006-03-03 14:50

China foreign exchange reserves are too large and investing them in US Treasuries is providing Washington with cheap financing at the expense of Chinese returns, the Chinese press reports.

"China's foreign exchange reserve hit 818.9 billion dollars at the end of last year but what China really needs should be no more than 250 billion dollars," economist Xiao Zhuoji told the Shanghai Securities Times.

"The current (holdings are) way above actual needs," he said.

Chinese reserves should be cut by more than two-thirds from current levels, said Xiao, who is also a member of the Chinese People's Political Consultative Conference (CPPCC), an advisory body to the government.

The advisory body is currently holding its annual meeting in Beijing ahead of the full parliamentary session of the National People's Congress starting Sunday.

China's reserves have doubled in the last two years, up from 403.3 billion dollars in 2003 on the back of strong investment flows and funds betting on a future revaluation of the currency.

Analysts widely expect Beijing's rapid build up of reserves to overtake Japan, the world's largest holder of foreign exchange reserves of 846.9 billion dollars at the end of last year.

Xiao, who made similar comments last week, said that most of China's foreign exchange reserves are mainly invested in low yielding US treasuries (government bonds), effectively providing "low-cost" financing for Washington.

The government needs to change its conservative mind-set and encourage capital outflows and should allow companies and individuals to hold more foreign currency, Xiao said.

Liberalizing money outflows is part of China's overall reform to make its currency regime more market-oriented but regulators have yet to take any significant steps towards loosening strict regulations given concerns over the health of the country's financial system.