via Forbes.com China PBOC advisor warns forex reserves face US dollar risks - report 04.27.2006, 01:28 AM
BEIJING -- China's growing foreign exchange reserves, which are likely to hit $1 trillion this year, face huge risks from a possible US dollar decline and China has to take urgent measures, a Chinese central bank monetary committee member said.
Yu Yongding, the only non-government member of the committee and an economist with the Chinese Academy of Social Sciences, was cited by the China Business News as saying that China's current management of the foreign exchange reserves, by investing heavily in US treasuries, is neither profitable nor safe.
"A large amount of China's foreign exchange reserves is in the form of US dollar assets, and any US dollar depreciation or US economy inflation could result in losses for China. We have to make preparations for that possibility as quickly as possible as a way to avoid such a bad scenario," said Yu.
In addition, Yu said China's heavy investment into US dollar treasuries is actually providing cheap funds for overseas investors, thus allowing foreign investors to have enough capital to re-invest in China.
"We are actually exporting capital to fulfill the saving-investment gap in the US, and we are sacrificing lucrative investment returns for low-yielding returns in US treasury bonds," said Yu.
