Economy

China should reduce dollar-reserve assets: Yu

(Agencies)
Updated: 2010-07-20 13:33

China should reduce its holdings of US dollar assets to diversify risks of "sharp depreciation," Yu Yongding, a former adviser to the central bank, wrote in a commentary in the China Securities Journal.

The nation should convert some holdings currently in US dollars into assets denominated in other currencies, commodities and direct investments overseas, he recommended. China's dollar assets are surplus to requirements and the proportion is too high, Yu said.

"It's completely possible and also necessary for China to expand direct investments in Asia, Africa and Latin America," he wrote. "It's also a rare opportunity for Chinese companies to acquire businesses overseas."

The dollar has declined 7.5 percent against the euro since reaching a four-year high on June 7 as concern eased that a debt crisis would spread from Greece across the continent. Europe remains a key investment destination for China's foreign-exchange reserves, Premier Wen Jiabao told German Chancellor Angela Merkel in Beijing on July 16, according to the Xinhua News Agency.

China, the biggest foreign investor in US government bonds, lowered its holdings by $32.5 billion in May to $867.7 billion, the Treasury Department reported in Washington on July 16. The nation bought a net 735.2 billion yen ($8.3 billion) of Japanese bonds in May, doubling purchases for this year.

It is a good time to sell because demand for US Treasuries is high, Yu wrote. China should adjust its investment holdings in US debt by increasing exposure to short-term bills and reducing long-term notes, Yu said, according to the article.

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China has slashed holdings of short-term US debt, including bills, which dropped to $6.8 billion in May from a peak of $210.4 billion a year earlier, Treasury data showed.

Euro swings

Yu said in an interview in May that swings in the euro shouldn't have a "significant impact" on China's strategy of diversifying its foreign-currency reserves. He said an "appropriate" policy for China would be to allocate its reserves with reference to the weightings of Special Drawing Rights, a unit of account of the International Monetary Fund.

The benefits of investing in US government debt include "relatively good" safety, liquidity and low trading costs, the State Administration of Foreign Exchange said July 7 in a statement on its website. China increasing or cutting the amount of US debt it owns "is normal" and decisions are made based on market conditions, it said.