Experts warn of risks in China's forex reserves

10:40, November 30, 2009      

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China's rapidly growing forex reserves face risks including depreciation of the U.S. dollar and private capital outflux, said some experts at a forum. Risks in China's forex reserves may threaten the country's sustainable economic growth.

By the end of the third quarter 2009, China's forex reserves totaled 2.27 trillion U.S. dollars, 330 billion U.S. dollars higher than the end of 2008.

"Although China has a huge forex reserve of over 2 trillion U.S. dollars, half is not stable and faces considerable risks," said Wu Nianlu, vice president of the China International Finance Society. He explained that forex reserves mainly consisted of current account surplus and capital and financial account surplus. Current account surplus comes from trade and non-trade surplus, and has lower risks. Capital and financial account surplus, which accounts for almost half of China's forex reserves, faces much higher risks.

Experts estimated that U.S. dollar accounts for around 70 percent of China's forex reserves. The Dollar Index, which tracks the greenback against the currencies of six trading partners, reached a 15-month low on November 25.

"China should gradually start to diversify its forex reserves," said Li Yining, a renowned Chinese economist. China should increase its strategic investment, he noted.

Meanwhile, Li warned of the risks of improper outflux of private capital. According to a report released by Thomson Reuters, between the beginning of this year and February 17, 2009, Chinese companies' overseas M&A increased by 40 percent year on year while global M&A dropped by 35 percent during the same time. Most Chinese companies involved were private-funded.

"If the amount of improper outflux of private capital becomes too large, China's forex reserves may face severe impact," said Li.

By People's Daily Online
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