China on thoughts for cutting dollar assets (Reuters) (05-01-2011)

BEIJING – According to a former adviser to the People’s Bank of China, China should cut holdings of dollar assets to limit losses on its foreign currency reserves while the yuan will be able to move more freely.

As a result, the central bank will avoid further rises in foreign exchange reserves and must reduce its intervention in the foreign exchange market. In case that intervention reduces, the exchange rate will appreciate in line with market supply and demand.

China's foreign exchange reserves, the world's largest, hit a record $2.65 trillion at the end of September, a reflection of heavy-handed intervention to hold down the yuan's value.

The government must let the public know that modest yuan appreciation is in line with China's own interests and is not bowing to U.S. pressure according to Yu, a professor at the Chinese Academy of Social Sciences. In addition, the policy easing had as a real purpose to accelerate the dollar's depreciation and boost U.S. export competitiveness.

In case holders of U.S. government debt and foreign holders face the dollar’s depreciation and worsening inflation, then there will be a release for U.S. debt losses.

Source: Reuters