China should tap FX reserves to buy gold - banker Sun Mar 26, 2006 9:28 PM ET
BEIJING, March 27 (Reuters) - China should use part of its fast-growing foreign exchange reserves to buy gold as it seeks to adjust the asset mix to hedge against risk, a Bank of China official was quoted on Monday as saying.
Analysts say China has been gradually diversifying away from the dollar -- although fears of a collapse in the U.S. currency will prevent any dramatic shift. Chinese officials have denied reports they plan to sell current dollar assets in the reserves.
"China should appropriately reduce the proportion of dollars in its foreign exchange reserves while increasing the proportion of currencies such as the euro," the Financial News quoted Wang Yuanlong, a director at Bank of China's Australian operations, as saying.
"We can use part of the foreign exchange reserves to buy gold, which would help make the reserves more diversified and help guarantee and increase their value," said Wang, former economist at Bank of China, the country's largest foreign exchange bank.
China's foreign exchange reserves swelled 34 percent in 2005 to a record $818.9 billion, but the central bank has not disclosed the composition.
Last month, state media quoted Wang as saying China should ideally hold between $300 billion and $400 billion in foreign exchange reserves.
China has been a big buyer of U.S. government bonds, helping to finance a heavy U.S. current-account deficit and to keep American interest rates low. Investors watch closely for any sign that Beijing might shift the government's investment mix.
Central bank chief Zhou Xiaochuan said earlier this month that China would adjust the mix of its reserves in light of global market conditions. In doing so, China's criteria would be safety, liquidity and profitability, in that order.
China's currency reserves have soared in recent years as the central bank, in order to hold down the yuan, bought most of the dollars generated by a growing trade surplus, inflow of foreign direct investment and speculative capital.
The fast-growing foreign exchange holdings signal persistent upward pressure on the yuan, despite China's landmark 2.1 percent revaluation of the currency in July, analysts say.
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