SHANGHAI, April 19 China's huge stockpile of
foreign exchange reserves, the world's largest, have become
excessive and the government must diversify investments using
the reserves, Zhou Xiaochuan, governor of the People's Bank of
China, said in comments published on Tuesday.
The country's foreign exchange reserves swelled by nearly
$200 billion in the first quarter of this year to more than $3
trillion, indicating hefty capital inflows, and the government
has so far focused on investing mainly in U.S. dollar assets,
including U.S. Treasures.
"Foreign exchange reserves have exceeded our country's
rational demand, and too much accumulation has caused excessive
liquidity in our markets, adding to the pressure of the central
bank's sterilisation," Zhou was quoted by the official Shanghai
Securities News as saying.
"The State Council has required a cut in excessive
accumulation and good management of the funds accumulated,
including diversification of investments," Zhou was quoted as
telling forum at Tsinghua University in Beijing.
To keep the yuan exchange rate stable in a
capital account control system, the PBOC injects huge amounts of
yuan into the banking system by buying foreign currencies from
The central bank then soaks up the excess yuan in the system
via open-market operations and higher bank deposit reserve
requirements. This is to prevent the money from flowing into the
economy and fuelling inflation.
The newspaper did not quote Zhou as giving any details on
the diversification of foreign exchange reserve use, although
Chinese economists have urged the government to buy more assets
in other currencies, such as euro and yen, as well as to invest
in strategic goods such as oil and non-ferrous metals.
Commenting on other aspects of China's economy, Zhou was
quoted as saying that the central government was considering
letting local authorities issue municipal bonds for the first
time as the main avenue for future financing of regional
Local governments have so far relied mainly on sales of land
for such financing, supported by quasi-treasury bonds issued by
the central government on their behalf or special funds.
That has helped inflate China's real estate prices and
caused strong resistance from regional authorities to steps from
the central government to cool the property market, among other
(Reporting by Lu Jianxin and Jacquline Wong; Editing by Ken