China may use FX reserves to buy oil - plans SPR

Tuesday, May 31, 2005

China is exploring ways to use some of its huge foreign exchange reserves to buy imported oil, according to a report from Tuesday on chinadaily.com. This news comes on top of Chinese expectations that the far eastern giant will be able to sustain 8 percent annual economic growth over the next decade.
The Shanghai Securities News reported, citing an unidentified source, that the plan was first proposed as early as 2000 and would help China attain the twin objectives of making better use of its foreign exchange and ensuring vital oil supplies.
The Chinese newspaper quoted Li Yang, a senior economist at the Chinese Academy of Social Sciences and a former member of the monetary policy committee under the central bank, as saying the plan to use foreign exchange reserves to build up strategic oil reserves is reasonable.
Forex reserves grew 67 percent within a year
China had foreign exchange reserves of 659 billion dollars at the end of March. This is 67 percent more than a year ago. Some local economists have recommended that China diversify its reserves, which are still heavily weighted in US dollars.
In March, Guo Shuqing, director of the State Administration of Foreign Exchange, suggested China could use some of its foreign exchange reserves to purchase imported oil.
China already plans to build a strategic oil reserve, though this plan is believed to be making slow progress.
Niu Li, a researcher on global oil issues with the State Information Center, was quoted in the Shanghai Securities News, saying the government should speed up this plan to shift reserves into oil in order to reduce investment risk.
The paper also brought an announcement that China will scrap its sharply increased export duties for textiles, only 10 days after they were introduced. China had imposed export duties of up to 400 percent.
Xinhuanet, the official news agency, quoted 1999 economics Nobel prize winner Robert Mundell extensively. Mundell said that China should ignore outside pressure and keep the Yuan exchange rate stable at a high-profile conference attended by several Nobel laureates in Beijing. If the Chinese currency were to be revalued, overseas direct investment will decrease and lead to more unemployment, affecting even the rest of East Asia, he said.
Vernon L. Smith, the 2002 winner, said the huge and growing trade between America and China greatly benefits both countries. "By outsourcing to foreign countries, US businesses save money that is available to invest in new technologies, new jobs and remain competitive in world markets. We should let it happen," Smith said. However, "many American citizens will not now agree with that."
Robert W. Fogel, who won the Nobel Prize for Economics in 1993, told China Daily that there were two reasons why the global community gained from China's development.
"First, China is producing more and more goods that can be of a very high quality and at a much lower price," Fogel said. "Secondly, China will need more goods and services from other places such as Europe and the United States," he said.

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