UPDATE 2-China Needs to Diversify FX Reserves -c.bank Adviser

Tuesday, 23 Aug 2011 06:37 AM


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* Says China should diversify FX holdings into non-financial assets

* Says the government worry about safety of reserve assets

* China should have more agencies to manage FX reserves -Xia

* Reiterates view on long-term dollar weakness (Adds fresh comment)

BEIJING, Aug 23 (Reuters) - China should diversify its huge foreign exchange reserves into non-financial assets to hedge against risks from a long-term decline in the U.S. dollar, Xia Bin, an academic adviser to the central bank said on Tuesday.

"The Chinese government is certainly worried about (the safety) of its foreign exchange reserves," Xia told a forum.

"China should reduce the portion of financial assets in its reserves and increase the portion of non-financial assets," he said.

Xia said China should use its reserves to buy overseas energy, resources and equity instead of buying more euro debt.

China has long advocated diversifying its war chest of $3.2 trillion of reserves away from the dollar, but as much as 70 percent of the holdings are still invested in U.S. dollar assets, including U.S. Treasuries, according to analysts.

Chinese officials and the public have expressed growing concerns over the safety of its reserve assets in the United States after the Standard & Poor's downgrade of U.S. debt.

Xia said China must improve the way it manages the rapidly accumulating foreign exchange reserves by allowing more government agencies to manage the assets to better serve China's "strategic interests".

Currently, the State Administration of Foreign Exchange (SAFE) manages the bulk of China's reserves alongside the China Investment Corp (CIC), the country's $400 billion sovereign wealth fund.

Xia reiterated his long-held view: that the U.S. dollar is likely to weaken over the long-term as the Federal Reserve keeps policy loose to support the weak economy, although the U.S. currency may rebound in the short run.

Dollar weakness could persist in "the coming decade, two decades or half a century", he added.

Fears of another U.S. recession and the Fed's ultra-loose monetary policy have put more pressure on the dollar to weaken against major currencies as well as the Chinese yuan. .

China must move cautiously in opening up the capital account and freeing up the yuan exchange rate, Xia said.

The adviser also urged expansion of channels for yuan to flow out of the country as a way to give the Chinese currency a higher international profile.

China's full-year inflation could be between 4 percent and 5 percent in 2011, Xia said, adding that the central bank should stick to a "prudent" monetary policy.

"Some said that there's over-tightening and there must be a shift, but that will not happen," he said. (Reporting by Zhou Xin and Kevin Yao; Editing by Ken Wills and Ramya Venugopal)

© 2014 Thomson/Reuters. All rights reserved.

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