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Opinion / China Watch

Wu: Central Bank buys yen

By Berni Moestafa (Bloomberg)
Updated: 2006-11-16 14:55

The People's Bank of China, which holds $1 trillion in currency reserves,
has been buying yen, Deputy Governor Wu Xiaoling said.

Asked whether the central bank had been buying Japan's currency, Wu said:
"We have." "We have been holding Japanese yen in our foreign exchange
reserves for many years," she said on the sidelines of a conference
organized by Bank Indonesia in Bali. She declined to say if the pace of
buying had increased.

Central banks in Russia, Switzerland and New Zealand are increasing
holdings of yen, anticipating the currency will rebound from a 20-year
low on rising interest rates and the longest economic expansion since
World War II.

China is diversifying its reserves, about two-thirds of which are held in
dollars. The nation's investors own $339 billion of Treasuries, the
second-largest overseas holding after Japan.

"They seem to be testing the water and moving toward more diversification
away from the dollar and into the yen and probably the South Korean won
too," said Nizam Idris, a currency strategist at UBS AG in Singapore.
"Though they're not selling dollars to buy yen, just buying less of the
dollar."

The yen rose to 117.82 per dollar at 11:03 a.m. in Tokyo compared with
118.02 late in New York yesterday. Japan's currency was also at 151.16
against the euro from 151.39. In October, it was at the lowest since 1985
against currencies of major trading partners, according to a monthly Bank
of Japan index.

The yen rallied in the final two days of last week after Central bank
Governor Zhou Xiaochuan said China intends to diversify its reserves,
without dumping dollars.

Reserve Requirements

The central bank increased interest rates twice this year and raised the
amount of deposits lenders must hold as reserves three times to help
drain excess cash in the financial system to curb investment and lending.

"Whether we will adjust the requirement is not so based or not pointed to
the general economy but to the liquidity in the market," said Wu. "Based
on the double surplus in both the current and the capital account. It's
up to you to decide whether China has excess liquidity or not."

China's reserves continue to swell as it buys dollars to prevents the
yuan from appreciating too rapidly. Foreign- currency reserves have
increased from $794 billion a year ago. China abandoned the yuan's peg
against the U.S. currency in July last year and allows a gain or loss of
0.3 percent a day against the dollar.

China's Growth

Gross domestic product increased 10.4 percent at an annual rate in the
third quarter, the third straight period of expansion faster than 10
percent.

U.S. trade deficit with China reached a record $23 billion in September.
The trade deficit is on target to exceed last year's record $201.6
billion by more than 6 percent, according to the U.S. government.

Central banks worldwide are turning to higher-yielding assets in their
reserves, such as buying Fannie Mae bonds instead of Treasury bills, and
diversification hasn't reduced the share of dollars among reserves
worldwide. Dollars accounted for 66 percent of reserves at the end of
March, little changed from 70 percent in 2001, the BIS quarterly report
showed.

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