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CHINA / National

Chinese encouraged to invest abroad
(chinadaily.com.cn/Reuters)
Updated: 2006-04-27 11:54

Let the yuan rise gradually - adviser

China should let the yuan rise gradually and diversify its fast-growing foreign exchange reserves away from the dollar to reduce concentration risks, an adviser to the central bank said in remarks published on Thursday.

The government should also act to abolish its long-standing preferential tax treatment for foreign investors, the China Business News quoted Yu Yongding, a prominent economist who sits on the central bank's monetary policy committee, as saying.

"We should let the yuan appreciate, but only through a gradualist approach," the newspaper quoted Yu as saying.

"The pressure on the yuan to appreciate is growing, but it can't rise too fast because that will hit export-oriented firms, including textile companies," he said.

China's growing trade surplus and inflows of foreign direct investment had pushed up its foreign exchange reserves, generated upward pressure on the yuan and made it harder for the central bank to manage monetary policy, Yu said.

China's foreign exchange reserves, which reached a world record $875.1 billion at the end of March, were on track to hit $1 trillion by the end of this year, Yu said.

"The foreign exchange reserves will continue growing for a relatively long period and a large part of the reserves are being held in the form of U.S. dollar assets," he said.

"The assets are likely to lose their value if the dollar weakens or inflation picks up in the United States. So we must make early preparations to prevent possible trouble."

Analysts suspect China has been gradually reducing the share of dollars in its reserves, but fears of a collapse in the U.S. currency will prevent it from making any dramatic shift.

The rapid build-up of foreign exchange reserves meant the central bank, in order to control the money supply, had to issue more bills to mop up, or sterilise, the yuan it issued when buying dollars flowing into China, Yu said.

"My personal view is that such a sterilisation policy is unlikely to continue forever, because the return on commercial banks' assets will be affected if it persists," Yu said.

The central bank buys dollars to ensure the yuan does not rise too sharply against the dollar despite the landmark 2.1 percent currency revaluation in July.

Critics in the United States say the yuan remains undervalued, giving Chinese exporters an unfair edge.


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