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China diversifies forex holdings amid dollar fears Original Source Link: (May no longer be active)    http://www.reuters.com/financeNewsArticle.jhtml?type=bondsNews&storyID=4917007 http://www.reuters.com/financeNewsArticle.jhtml?type=bondsNews&storyID=4917007 UPDATE 1-China diversifies forex holdings amid dollar fears Fri Apr 23, 2004 12:10 AM ET (Updates with exchange rate reform, adds background) LONDON/BEIJING, April 23 (Reuters) - China is diversifying the make-up of its foreign currency holdings to include more European and Asian bonds amid concerns over the weak dollar, the country's forex regulator said in comments published on Friday. Guo Shuqing, head of the State Administration of Foreign Exchange, also said the yuan (CNY=CFXS: Quote, Profile, Research) could be "basically" convertible in around five or six years if reforms go smoothly, the Financial Times reported. The comments come before a meeting of the Group of Seven (G7) economic powers of the United States, Japan, Germany, Britain, France, Italy and Canada. Although China is not a G7 member, its yuan policy is thought to have been a hot topic in past G7 discussions. The yuan's fixed exchange rate, at about 8.28 to the dollar, has been a target of criticism from the United States and other countries that say it gives China an unfair trade advantage. The fact that the yuan is not freely convertible has led to a rapid rise in forex reserves as the central bank is forced to buy up a flood of foreign currency. Hitting nearly $440 billion at the end of March, China's reserves are the world's second-biggest after Japan. "As China's foreign exchange reserves grow continuously, we are actively studying opening up new areas of investment in order to spread risk and increase returns," Guo was quoted as saying. China has kept secret the composition of its forex reserves, but Guo said the country had recently bought more European, including Italian, government bonds and was considering similar purchases in Asian markets. U.S. dollar-denominated investments would continue to form the bulk of China's foreign currency reserves, he added. China had a clear, five-part plan to prepare for greater flexibility in the exchange rate system, Guo said. He did not give a timetable for currency convertibility, and said the capital account would never be totally free.

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