China's central bank voiced support for a strong dollar on Monday just as the country's premier expressed concerns over preserving the value of the nation's $1.43 trillion foreign exchange reserves.
Central bank governor Zhou Xiaochuan said Beijing hoped for an orderly solution following recent market turbulence stirred by defaults of US mortgages and that it sought dollar strength given the global economic context.
"So in this sense actually we hope to see a strong dollar," he told reporters. "We support a strong dollar," he said, adding his comments were unrelated to China's forex reserves.
Zhou's comments in South Africa coincided with others relayed by Chinese Premier Wen Jiabao in Singapore. In a speech touching on other economic issues, Wen said Beijing was under pressure to preserve the value of its reserves, the world's largest. "We have never been experiencing such big pressure," Wen told a gathering of businessmen. "We are worried about how to preserve the value of our reserves."
China does not disclose the composition of its reserves, but some analysts reckon 65-70 percent are held in dollar-denominated assets. Analysts also believe Beijing has gradually reduced the proportion of its dollar holdings to diversify its investments.
Underscoring just how jittery markets have become the euro hit a record high above $1.47 in early November after Cheng Siwei, a senior parliamentarian with no influence on policy making, made comments suggesting reserve diversification.
Asked in Cape Town if China should or was already investing in stronger currencies and what he thought of Cheng's comments, Zhou said: "He is not in government and not in administration so it is his own opinion."
"Central banks always listen to all kind of opinions but it doesn't mean we do something according to what they talked (about) ... we have our own analysis and have our own policy."
The dollar's recent slide was a major topic of discussion at a weekend summit of financial leaders of the Group of 20 (G20) economic powers and is expected to top the agenda at Monday's meeting of central bank governors in Cape Town.
The views of different central banks on the dollar were "close to each other" in the context of international gatherings such as the G20 and the International Monetary Fund, Zhou said.
No specific mention has been made of the yuan's role in ironing out global imbalances during three days of meetings in South Africa although Zhou and Wen have reiterated Beijing would make the yuan more flexible over the past two days.
Although China revalued the yuan by 2.1 percent in July 2005, when it also unleashed it from its dollar peg to float within managed bands, major trading partners have stepped up calls for Beijing to allow more rapid currency appreciation.
Critics say China has been artificially holding down the value of its currency, giving domestic exports an unfair headstart and fuelling global imbalances. Turning to the domestic economy, Zhou said Beijing need not raise interest rates too frequently given consumer inflation - which hit an 11-year high of 6.5 percent in October - was coming mainly from rising food prices.
But China could not rule out further rate rises although none were on the cards "next week", he said. The central bank has already raised rates five times this year.
Given excess liquidity in the economy, China would continue to raise banks' reserve ratios, Zhou said. "We are going to continue to withdraw the liquidity by raising the reserve requirements. We still have a large room for doing so," he said. Beijing said this month it would raise banks' reserve ratio to a record high of 13.5 percent, effective November 26. Zhou also commented briefly on the impact of US economic turbulence on the balance sheets of Chinese banks.
Provisions made by Bank of China - the country's top foreign exchange lender with a relatively large presence overseas - were prudent, he said. China's other banks as a group had very limited indirect exposure to the subprime problem, he said.
In a separate development which could potentially cloud the profit outlook, sources told Reuters Beijing had ordered banks to limit their lending until year-end as part of efforts to prevent the world's fourth-largest economy from overheating.
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