Skip to main content

China, the world's biggest holder of foreign exchange reserves, renewed its commitment to the U.S. Treasury market on Tuesday but said it would be wary of substantially boosting its gold holdings.

The country's chief currency regulator said China would attract more capital inflows this year, partly reflecting expectations of a stronger yuan, but he left the market none the wiser as to when Beijing might let the currency resume its rise.

"The U.S. Treasury market is the world's largest government bond market. Our foreign exchange reserves are huge, so you can imagine that the U.S. Treasury market is an important one to us," Yi Gang, head of the State Administration of Foreign Exchange (SAFE), told a news conference.

Cat:e528746c-3414-401a-b14b-50247e3bdf01Forum:2d13dc33-9921-4d4a-815f-e809277631e4

The exact composition of China's $2.4-trillion (U.S.) of reserves, the world's largest, is a state secret and the subject of intense scrutiny by global investors aware that, with such large sums at stake, even marginal portfolio shifts have the potential to move markets. Global investors are equally attuned to any clues about the yuan, given its role in China's trade with the rest of the world and the potential spill-over effect a stronger yuan would have on other currencies in Asia.

Speaking during the annual session of parliament, Mr. Yi expressed the hope that China's presence in the U.S. Treasury market would not become a political football. China, he stressed, was not in the game of short-term currency speculation.

"It is market investment behaviour, and I don't want it to be politicized," he said. "We are a responsible investor, and we can surely achieve a win-win result in the process of investing."

Mr. Yi dampened hopes of gold bulls that China might be itching to add to the 1,054 tonnes of the metal in its reserves.

On a 30-year horizon gold was not a great investment, he said, and China would simply drive up prices if it piled into the market.

"It is, in fact, impossible for gold to become a major investment channel for China's foreign exchange reserves. I have 1,000 tonnes now, and even if I doubled that holding, according to current prices, that would be about $30-billion," Mr. Yi said.

The bullion price fell about $3 an ounce on Tuesday morning to around $1,121, but that reflected unwinding of speculative bets linked to Greece's debt woes rather than disappointment over Mr. Yi's remarks.

"The market discounts the China story. It's an old story. I don't think China will buy gold in the open market. They will buy gold from their own mines," said a dealer in Hong Kong.

Diversified Bets

Bankers assume two-thirds of China's reserves are invested in dollar assets, but Mr. Yi said SAFE had appropriately spread its holdings, with the euro and yen as well as some emerging market currencies in China's portfolio.

"The foreign exchange reserves are mainly invested in bonds issued by governments and government agencies of the developed and developing countries with high credit ratings, assets issued by companies and international organizations, funds and so on," he said in a prepared statement before meeting reporters.

The official cast no light on the prospects for the yuan, which China has effectively re-pegged at around 6.83 yuan per dollar since mid-2008 to help its exporters weather the global credit crunch. Beijing dropped the yuan's dollar peg in 2005 and allowed it to climb about a fifth in the run-up to the crisis.

Mr. Yi repeated the mantra that China would keep the currency basically steady and sidestepped a question about Delphic remarks by central bank governor Zhou Xiaochuan.

Mr. Zhou broke new ground on Saturday by stating that China would sooner or later exit the "special yuan policy" adopted to counter the financial crisis.

In the absence of fresh guidance, the yuan marked time in the offshore non-deliverable forwards (NDFs) market.

The one-year dollar/yuan NDF stood at 6.6400 in mid-morning, little changed from Monday's late levels and implying yuan appreciation of about 2.8 per cent over the next year.

But Mr. Yi said expectations of a stronger yuan would intensify this year, attracting "cross-border arbitrage" funds, because of the country's relatively high interest rates.

Proceeds from exports would also rise as global recovery generated demand for Chinese goods.

"With foreign direct investment expected to increase steadily, China will be facing greater pressures from the rising amount of foreign exchange inflows," he said.

IMF on Yuan

China's yuan is still "very much undervalued", the head of the International Monetary Fund said on Tuesday, although he added that a focus on domestic growth could lead to changes "in the coming months."

"The crisis has been the trigger for the Chinese economy to move to a more traditional model of growth," IMF managing director Dominique Strauss-Kahn said during a lecture in Johannesburg.

"What goes with this kind of policy is a revaluation of the Chinese currency," he said. "We may get changes in the coming months."

The yuan has been locked in place against the dollar for nearly two years, as Beijing has effectively re-pegged its exchange rate to buffer China's economy against the ravages of the global financial crisis.

Mr. Strauss-Kahn also described increased savings rates by American households since the financial crisis as a "huge change in the global economy" that would start to address the structural imbalances between Asia and the United States.

However, he said the Chinese and other emerging market consumers were still a long way off being the engine of world growth to replace the United States.

"You are not going to replace the American consumer with the Asian consumer just in a few weeks," he said. "You don't change the route of a big ship like this one overnight."

As a result, the world economy was now in uncharted territory, he said.

"We're not going back to business as usual," he said. "The growth model of the global economy is basically unknown."

Interact with The Globe