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China hints sticking to dollar despite worries

China has maintained a consistent allocation of its foreign exchange reserves across different currencies, a senior official said, suggesting that any diversification away from the dollar has been gradual.

Wang Xiaoyi, deputy head of the State Administration of Foreign Exchange, which manages China's $2.3 trillion of currency reserves, also said the weakening of the dollar was a long-term trend, not a near-term worry.

China's desire to see a stronger dollar was reinforced by an opinion piece in the People's Daily, the main newspaper of the ruling Communist Party, which said that the slumping greenback was harming the world economy.

Global markets have periodically been shaken by the idea that China could dump dollars, as it is estimated to hold about two-thirds of its currency reserves in dollar-denominated assets. Beijing itself has long declared that it aims to diversify its forex reserves, the world's biggest such stockpile.

“We now have similar proportions of different currencies in our forex reserves as we had before,” Wang said on the sidelines of a conference in Beijing.

“The weakening of US dollar will be a long-term trend but we don't see big fluctuations in the near term,” he added.

Despite expressions of concern about the yawning US debt, China has continued accumulating dollars this year as it must buy those streaming into the country through its trade surplus to keep the yuan from appreciating.

“We are not making any big adjustment in how to manage our foreign exchange reserves, and all our operations are in line with our existing forex management goal,” Wang said.

The weak dollar has complicated monetary policy in China, as in other countries that fix their exchange rates to the dollar.

Raising interest rates would widen their rate differential compared with the United States, potentially attracting speculative capital. But keeping rates flat is arguably too loose for economies that have recovered as strongly as China's.

The People's Daily vented these frustrations on Friday.

The sluggish dollar was “holding back” other countries' economic recovery, forcing them to choose between squeezed exports and inflation risks, Zeng Gang, an economist at the Chinese Academy of Social Sciences, said in a commentary.

“The sustained weakness of the dollar is to a considerable extent holding back the economic recovery and policy adjustments of other countries,” said the commentary, adding that the weak dollar was a “heavy blow” to their exports.

If other countries “allow their currencies to freely appreciate, then their already severely diminished exports will deteriorate,” it said.

“If they maintain exchange rate stability (against the dollar), their central banks will have to buy more dollars on the foreign exchange market, and this will increase liquidity in their own currencies, further inflating asset prices,” it said.

The comments echoed those last month by Chinese banking regulator Liu Mingkang, who said that ultra-low US interest rates and weak dollar were a “new systemic risk” for the global economy.

Liu had said that a carry-trade funded by the cheap dollar was driving speculators to invest in emerging markets and having a “massive” impact on asset prices.

Such criticism was dismissed by US Federal Reserve Chairman Ben Bernanke on Thursday.

Answering questions at a confirmation hearing, he said countries that are concerned about speculation “have their own tools to address bubbles in their economy” and shouldn't look to US monetary authorities to do the job for them.

Zeng, writing in the People's Daily, said that “swift policy actions” were required to minimize the dangers posed by a weak dollar.

But “traditional methods” such as interest rate and exchange rate adjustments were of little use in this effort, and regulators must instead strengthen supervision of markets, he said.

In a similar vein, a government economist argued in a separate commentary that China should use targeted policies to prevent a property market bubble from inflating.

China should enact a property tax “at a suitable time” and assess additional taxes on second and third homes to limit speculation, Ding Yifan, a researcher at the Development Research Center under the cabinet, wrote in the China Daily.

China allowed the yuan to rise 21% against the dollar between July 2005 and July 2008 before effectively repegging it to help its exporters cope with a slump in global demand.

Beijing now faces mounting international calls to let the yuan, or “renminbi,” rise on the grounds that it is undervalued and stoking imbalances with other big economies, but showed no public sign of budging during summits with US President Barack Obama last month and, earlier this week, with European leaders.

The demands on the yuan were “unfair” and amounted to an attempt to restrict China's growth, Premier Wen Jiabao told EU leaders this week. (Reuters)