China Forex Reserves Must Not Grow, Says Vice President

China's forex reserves rose further to hit $954.5 billion at the end of July but they must not be allowed to grow much more because of the upward pressure they put on the yuan, Vice President Zeng Qinghong said Sept. 5.

The latest figure translates into 30.3% growth from $732.7 billion at the end of July 2005 and places China well on track to hold an unprecedented one trillion dollars in forex reserves by the end of the year.

Zeng, writing in an article published on the website of the official Study Times, said China will take measures to ensure that there is no further significant rise in the reserves. "The foreign exchange reserves have reflected China's growing economic power but on the other hand they have increased exchange rate risks and added upward pressure on the yuan," he said in the article. "We will take comprehensive measures to avoid further significant growth in the foreign exchange reserves," he added.

The government will take measures to boost Chinese technology imports as well as "increasing imports of important strategic natural resources," said Zeng.

Analysts said this might suggest that China is stepping up its strategy of securing commodities needed to power its economy. "The U.S has rich oil resources but it still purchases a lot of crude oil," said Peng Xinyun, an economist at the Chinese Academy of Social Sciences CASS, the top government think tank. "If they can do it, why not us?"

To keep a stable exchange rate, Beijing has to constantly buy up the dollars coming into the system with yuan which in turn boosts liquidity in the local financial markets. That liquidity in turn has to be soaked up via the sale of government debt instruments to avoid inflationary pressures but the question is how long this can continue.

Copyright Agence France-Presse, 2006

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