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China should scale back its U.S. dollar asset holdings to avoid risks in the event of a sharp weakness in the greenback or higher inflation in the U.S., a former People's Bank of China adviser Yu Yongding wrote in an article published in the state-run China Securities Journal on Monday.
China's foreign exchange reserves hit a record $2.454 trillion in the second quarter, the world's biggest. In May, Beijing reduced its U.S. Treasury holdings to $867.7 billion from $900.2 billion in April, yet maintaining the first position among the foreign holders of Treasury securities.
Yu said China should convert some of its U.S. dollar denominated assets into other currencies, commodities and direct investments. He wrote China has much bigger U.S. dollar asset holdings than is necessary, which may prove risky sometimes.
China should make use of the recent rise in U.S. price rise to gradually pull back from the Treasury market, he said. According to him, exiting now will not cause huge price fluctuations and China will not suffer severely.
But, China's State Administration of Foreign Exchange said earlier in the month that it is confident of achieving stable returns in the long run from its foreign exchange reserves. According to SAFE, a decline in the value of U.S. dollar will not result in any real loss from Chinese foreign reserve investment. The regulator said currency translation losses are only paper loss and it will not realize any loss unless the central bank exchange it back into yuan.
The People's Bank of China will resort to such measure only if there is a war or a huge crisis, SAFE said. Actual purchasing power of reserve assets rose steadily and returns on Chinese reserves exceeded U.S. inflation for many years, it added.
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