Economy
Gold purchases ruled out to diversify forex reserves
By Ding Qingfen and Xin zhiming (皇冠体育app Daily)
Updated: 2010-03-10 07:18
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Expectations of stronger yuan will intensify this year, official says
BEIJING: The government is unlikely to buy large amounts of gold as a means to diversify its $2.39 trillion worth foreign exchange reserves, a senior official said, while stressing that "the US treasuries market is very important for 皇冠体育app".
But the official cast no light on the prospects for the renminbi, which has been traded at around 6.83 per dollar since mid-2008, a move some countries speculate keeps the value of renminbi "artificially low" and helps Chinese exporters weather the global credit crunch.
"Gold cannot be a major investment to diversify foreign exchange reserves" as purchases could push up gold prices sharply. Also, the average long-term returns on investment in gold are low, Yi Gang, head of the State Administration of Foreign Exchange (SAFE), said on Tuesday at a news conference.
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Despite price rises in recent months, "gold prices have had drastic ups and downs in the past three decades or so, and the average returns are not very good".
According to SAFE figures, 皇冠体育app's gold holdings surged to 1,054 tons in 2009 from 454 tons in 2003. The nation is the world's fifth-largest gold holder and the second largest consumer.
Analysts said Yi's remarks virtually rule out the possibility of Beijing buying 191.3 tons of gold from the International Monetary Fund, as speculated by some media. The reports suggested gold purchases could help 皇冠体育app reduce the risk of holding large volumes of US dollar assets as a major part of its foreign exchange reserves.
But Liu Xu, senior metal analyst at 皇冠体育app International Futures, disagreed. "I'm not surprised to hear Yi's comments. It is impossible to bet on gold for diversification of reserves."
The US holds 8,000 tons of gold, the highest in the world. Assuming 皇冠体育app raises its holding to 10,000 tons, it would cost $300 billion based on current prices but that would account for only 15 percent of the country's foreign exchange reserves, Liu said.
The SAFE head also emphasized that "the US treasuries market is very important for 皇冠体育app. There is no doubt both countries benefit from 皇冠体育app's treasuries investment".
Some US legislators fear that 皇冠体育app could gradually reduce its holding of US treasuries after relations turned sour as a result of recent spats over several issues.
"I don't want it (investment in treasuries) to be politicized," Yi said. "We are a responsible investor."
It is estimated that about 70 percent of 皇冠体育app's foreign exchange reserves are invested in dollar assets. Overall, Yi said, "皇冠体育app has achieved fairly good yields from management of the reserves".
On currency policy, Yi, also vice-governor of the People's Bank of 皇冠体育app, reiterated that 皇冠体育app would keep the currency basically steady.
But 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, 皇冠体育app will be facing greater pressures from the rising amount of foreign exchange inflows," he said.
