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Will China sell significant dollar reserves?

*Associated Press, by Joe McDonald, January 16, 2006

China’s Foreign Currency Reserves Grow to $818.9 Billion, Up 34 Percent From a Year Ago

“China’s foreign currency reserves rose 34 percent last year to a record high $818.9 billion amid surging exports, state media reported Monday.

The news, coming less than a week after China reported that its trade surplus tripled in 2005, could add to pressure by the United States and other trading partners to loosen controls on the Chinese currency, the yuan, which they say is undervalued and hurts foreign competitors.

The central bank said reserves rose by $208.9 billion from the end of 2004, news reports said. At that rate, China’s reserves could reach $1 trillion this year, surpassing Japan’s, which stand at $846.9 billion as the world’s biggest.

“Record FX (foreign exchange) reserves and a widening trade surplus in 2005 all provide arguments for other countries to keep the pressure on China to let the CNY (the yuan) appreciate further,” the Bank of America said Monday in a report.

China’s foreign reserves have soared as China’s surging exports, especially to the United States, have brought home billions of U.S. dollars and other foreign currencies. Last week, the government said China’s 2005 trade surplus reached $101.9 billion, up from $32 billion the previous year.

China’s foreign currency regulator buys dollars and other foreign currencies and stockpiles them in U.S. Treasury bonds and other assets in order to limit the flow of currency into the economy, which it worries could set off inflation.

Analysts estimate that three-quarters of China’s reserves are in Treasuries, reflecting the dominance of the dollar in its trade.”

“The foreign currency regulator said earlier this month that its plans for 2006 include “actively exploring more efficient use of our FX (foreign exchange) reserve assets” and “widening the foreign exchange reserves investment scope.”

That prompted speculation that the government might sell dollars or dollar-denominated assets, but the central bank denied that.

The currency agency will face a “will face a tough task in how to handle the increasing huge reserves of foreign exchange,” the official Xinhua News Agency said.”


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