Chinese central banker urges diversifying into gold, oil, metals

By Wang Min and Zheng Jin
The Wall Street Journal
Wednesday, April 25, 2007

SHANGHAI, China -- China should "appropriately" increase its gold reserves and buy strategic resources such as oil and metals in order to broaden the investment channels for its huge foreign-exchange reserves, said People's Bank of China Vice Governor Xiang Junbo.

Mr. Xiang's comments yesterday come amid increasing discussion about how China will choose to invest its foreign-exchange reserves, the world's largest at $1.2 trillion as of the end of March. He said his comments, made in a speech at Fudan University in Shanghai, represent his personal views and don't necessarily reflect the stance of the central bank.

China's gold reserves have remained unchanged since December 2002 at 19.29 million fine troy ounces, according to central-bank data.

China is setting up a specialized investment agency to manage a portion of the reserves in a more aggressive fashion. Mr. Xiang said that agency could be funded by setting up a closed-end fund that would raise money from domestic investors, giving it cash to buy reserves from the central bank and invest them elsewhere.

The government should also continue its current policies of investing much of the reserves in low-risk bonds in overseas markets, and injecting some of the reserves into Chinese banks to help their expansion, he said.

Chinese holdings of U.S. Treasury securities totaled $350 billion at the end of 2006, and credit-ratings agency Fitch Ratings estimates that the country holds another $230 billion in U.S. government agency bonds.

Any decline in the U.S. dollar would hurt the value of China's foreign-exchange reserves, economists said, a prospect that has highlighted the cost of holding such a large portion of the reserves in U.S. Treasury bonds and has increased pressure to diversify.

* * *