http://www.fin24.co.za/articles/companies/display_article.asp?Nav=ns&lvl2=comp&ArticleID=1518-1783_1958691

China slams dollar reliance
27/06/2006 11:56 AM
Beijing - Countries around the world should gradually rely less on the
dollar for trade and their foreign exchange reserves, a Chinese central
bank official said in comments that pushed the dollar down against the yen.

Analysts say China has been gradually diversifying away from dollar
assets in its foreign exchange reserves, the world's largest, but fears
of a collapse in the US currency will prevent it from making any
dramatic shift.

"Internationally speaking, the situation of over-reliance on a certain
country's currency for international trade, settlements and reserve
assets should be gradually changed," Wu Xiaoling, deputy governor of the
People's Bank of China, said in remarks reported by the official
Financial News on Tuesday.

Wu did not specifically refer to the dollar by name, but it is the
world's main reserve currency and the one in which the bulk of trade is
conducted.

Reason to sell

Analysts said the comments were too general to signify any concrete
change in policy.

"The central bank is not going to give you a hint in terms of direction
of investment before they really do anything, so I don't read too much
into this sort of general remarks," said Qu Hongbin, economist with HSBC
in Hong Kong.

Still, dealers took the comments as a reason to sell the dollar, whose
long-term strength relies partly on central banks' willingness to stock
it as their main reserve currency. It fell by 03:08 GMT to ¥115.95 from
¥116.12 prior to the comments.

Last year, central bank chief Zhou Xiaochuan was cited in state media as
urging domestic companies to use non-dollar currencies, such as euro and
Japanese yen, in foreign trade and investment, to reflect more diverse
trading and investment patterns.

Some government economists have said China should convert some of its
foreign exchange reserves, which hit $875.1bn at the end of March, into
gold to hedge against weakness in the dollar.

Trade surplus

Asian central banks have amassed about $2.8 trillion in foreign exchange
stockpiles.

Wu was cited by the paper as saying that Asian countries needed to hold
large amounts of foreign exchange reserves to allow them to deal with
liquidity crises because they could not be assured of timely help from
the international community.

The newspaper also cited Wu as saying a stronger yuan alone could not
correct China's large trade surplus with the US.

The Sino-US trade gap was the result of global resource allocation by
multinational companies and needed to be addressed through the combined
efforts of the US and Asian countries, she said.

"Such trade imbalances cannot be resolved simply by adjusting the
exchange rate. It should be mainly resolved by adjusting the economic
structure," Wu was quoted as saying.

Pressure mounting

China faces pressure, especially from the US, to allow a faster rise for
the yuan, which critics say is significantly undervalued, making Chinese
exports unfairly competitive.

Beijing revalued the yuan by 2.1% and scrapped a dollar peg for a
managed float last July, but the currency has strengthened only 1.3% since.

China reported a trade surplus with the US last year of $114.2bn, while
Washington put the figure at $201.6bn, largely because it counts goods
shipped through Hong Kong as coming from China.

China has pledged to allow greater flexibility for the yuan over time,
but has stressed that it needs to be careful about the implications that
could have for employment and the country's financial system.