Beijing worried about weak dollar eroding value of its reserves
Premier Wen Jiabao is open to diversifying China’s foreign currency reserves, but US dollar remains the basis, also to prevent a loss of competitiveness of Chinese exports.

Singapore (AsiaNews) – As the value of the US dollars drops more and more, the government in Beijing is starting to worry about the impact on the value of its reserves.

Speaking before the National University of Singapore, Chinese Premier Wen Jiabao (in photo with Lee Kuan Yew, former prime minister of the city-state) admitted that the matter is of concern to the government, adding that financial markets are also wondering whether Beijing will buy stronger currencies in lieu of the US dollar.

“When our foreign reserves were small, we weren't under so much pressure,” Mr Wen said. “But now we can't help but be worried about how to preserve the value of our reserves, which have reached US$ 1.4 trillion.”

According to official statistics, the mainland's foreign currency reserves stood at US$ 1.43 trillion by the end of September, representing an increase of US$ 367.3 billion in the first nine months of the year.

With the US dollar at 1.47 euro, National People’s Congress Vice-Chairman Cheng Siwei suggested that China’s reserves should give more weight to stronger currencies in its reserves to offset the losses due to a weak dollar.

About 70 per cent of its foreign reserves are generally believed to be held in US dollar-denominated paper, principally US government bonds.

Amid rising concerns that Beijing might reduce its US dollar holdings, Yi Gang, an assistant governor of the People's Bank of China, came to the defence of the US currency.

He told a Washington-based public policy think-tank last week that, whilst China needed to diversify the composition of its reserve currencies, it was very firm about keeping the US dollar as the main constituent.

“It is also a very firm policy [. . .] that the US dollar is the main currency in our reserves,” he said, since it is “the largest currency that we use in terms of trade and foreign direct investment as well as financial clearances and settlements.”

The United States are China’s main trading partner. A stronger yuan, at a fixed rate against the dollar, combined with a weaker dollar would create problems for Chinese exports to the United States.

For Beijing exports are lifeline to prevent mass unemployment and social unrest.