China is shifting from stockpiling foreign exchange reserves in State coffers 
to letting businesses and residents hold more foreign currency, a top central 
bank official said yesterday. 
 
 
   Wu Xiaoling, vice 
 governor of the People's Bank of China. [newsphoto 
 file] | 
The policy adjustment will help reduce 
pressure on the authorities to mop up excess liquidity in the forex market to 
enforce the trading band of the renminbi exchange rate, analysts say. 
Wu Xiaoling, deputy governor of the People's Bank of China (PBOC), said: "A 
deficit in international balance of payments is not good, but too big a surplus 
is not helpful either." 
"Therefore we must readjust the economic structure," she said, adding that 
the forex policy should be adjusted accordingly. 
China is not pursuing huge forex reserves, Wu said. 
She stressed that the new policy stance is having more forex reserves "held 
by," instead of "hidden among," the people, clarifying misinterpretations in 
some recent media reports. 
As foreign trade surpluses continued to grow, China's official reserves rose 
to US$853.6 billion at the end of February, reportedly overtaking Japan as the 
biggest holder for the first time. 
The rapid increases in China's reserves resulted from policies that 
encouraged foreign direct investment and exports, as well as a forex 
administration regime that keeps tight controls on outflows but imposes little 
restriction on inflows, Wu said. 
The changes in a nation's forex reserves eventually reflect its macroeconomic 
performance and international payments, and there is no scientific method to 
measure the appropriate level, she said. 
Continued trade surpluses and inflow of foreign investment in recent years 
have led to rapid accumulation of China's forex reserves, a scarce commodity at 
a time of rigid central planning. 
Expectations of a stronger renminbi only fuelled the trend, with speculative 
capital flowing in and businesses taking more forex loans. Speculation of a 
further revaluation of renminbi remains strong in the marketplace even after 
China revalued the currency, which some trading partners complain is 
undervalued, by 2 per cent against the US dollar last July. 
The rapid forex increases have been forcing the central bank to issue more 
local currency to buy the excess dollars and enforce the trading band of the 
renminbi, complicating monetary policy operations at a time of ample liquidity 
in the banking system. 
Wu noted the central bank has taken a slew of measures to loosen capital 
controls, which allow businesses to keep more forex and sell less to banks. It 
also allows individuals to buy more forex from banks for such purposes as 
overseas travel and studies. 
(China Daily 04/06/2006 page1)