China Reserves to Favor Strong Currencies, Cheng Says (Update5)

By Josephine Lau


Nov. 7 (Bloomberg) -- China will invest in stronger currencies when diversifying its $1.43 trillion foreign-exchange reserves, said Cheng Siwei, vice chairman of the National People's Congress.

``We will favor stronger currencies over weaker ones, and will readjust accordingly,'' Cheng said in a speech before a conference in Beijing today. The dollar is ``losing its status as the world currency,'' Xu Jian, a central bank vice director, said at the same meeting.

Chinese investors reduced holdings of U.S. Treasuries by 5 percent to $400 billion in the five months to the end of August and the government set up an agency in September to seek higher returns on currency reserves. The U.S. dollar has weakened 4.7 percent against the yuan this year, while the euro has advanced 5.7 percent.

``Cheng has a history of speaking out on a range of financial market and economic developments and his comments are not always accurate,'' said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. Balancing U.S. currency and euro holdings ``would represent a massive selling of the dollar,'' Maguire said.

Cheng's remarks on Jan. 30 that China's stock rally was a ``bubble'' caused the benchmark index to fall the most in almost two years on Jan. 31. The Shanghai and Shenzhen 300 Index, then over 2,500 points, has since climbed above 5,300.

``China will use our income to readjust but that doesn't necessarily mean we'll buy more euros,'' Cheng told reporters after his speech. The National People's Congress, China's legislature, isn't involved in setting currency policy.

China Investment

China Investment Corp., which manages the nation's $200 billion sovereign wealth fund, said last month it may get more of the nation's reserves to invest. The company, established in September, will use about $67 billion to buy shares in the Agricultural Bank of China and China Development Bank, Li Yong, China's vice finance minister said at the conference. It will invest another one-third of its assets in financial markets.

``The world's currency structure has changed; the dollar is losing its status as the world currency,'' Xu from the People's Bank of China said at the conference.

The dollar slumped to $1.4704 per euro, the lowest since the 13-nation currency debuted in January 1999, before paring losses after Cheng's later remarks on euro purchases. It traded at $1.4671 at 11:03 a.m. in London from $1.4557 late yesterday.

Currency Is Challenged

``China will inevitably reduce U.S. dollar holdings as the currency is being challenged by the euro and currencies of other emerging market economies,'' said Peng Xingyun, an economist with the Chinese Academy of Social Sciences in Beijing. ``China wants to choose currencies that are performing strongly.''

Cheng also said China will keep ``autonomy'' on setting its exchange rate, responding to criticism from European and U.S. lawmakers that the currency is kept artificially weak.

``Excessive liquidity poses a risk to China's economy'' and may cause it to overheat, the lawmaker said.

A stronger currency would help to curb the inflow of cash from record trade surpluses that's bolstering currency reserves and may stoke inflation as well as property and stock bubbles.

The yuan rose 0.15 percent to 7.4421 versus the dollar as of the 5:30 p.m. close in Shanghai, the strongest since the end of a link to the U.S. currency in July 2005. The currency has gained about 11 percent since the fixed exchange rate was dropped.

China should keep the yuan at a ``reasonable, stable'' level while increasing flexibility, Li Dongrong, vice director of the State Administration of Foreign Exchange, said today. He also reiterated China's pledge to make the yuan fully convertible.

China should let the markets decide interest rates earlier and allow more funds to flow overseas, Li told reporters today in Beijing.