Transcripts

China's Government Tries To Figure Out What To Do With It's Money

LINDA O`BRYON: China's premier said today his government won't make any more surprise revaluations of the yuan and plans to improve the yuan exchange rate system. That comes on the heels of reports that China's foreign exchange reserve could soon top even that of longtime leader Japan. Hope Ngo reports from Hong Kong.

HOPE NGO, NIGHTLY BUSINESS REPORT CORRESPONDENT: One hundred and fifty million of its people may live below international poverty lines. That hasn't kept China from becoming the world's fourth largest economy or the owner of the world's second largest foreign exchange reserves after Japan. Earlier this year, the People's Bank of China announced a record jump of nearly $50 billion at the end of the fourth quarter last year to $819 billion. And analysts believe it won`t be long before China's Forex savings leave Japan in its wake.

The Chinese government isn`t revealing a breakdown of these assets. But an estimated 70 percent of its reserves are U.S. dollar-denominated, with $247 billion in U.S. Treasury bonds. The remaining 30 percent are in euros, Japanese yen and other Asian currencies. Some analysts, like Standard Chartered bank's Tai Hui, believe the money allows the Chinese government to enact more of what he described as creative policies.

TAI HUI: In China's case, they have been injecting banks with capital using for its reserves. There are talks of Chinese maybe looking to explore the opportunity of using the reserves to buy strategic oil reserves.

NGO: These moves haven't kept China`s critics from predicting the reserve will have a negative impact on the country's economic growth. A hike in foreign exchange reserves can result in domestic inflation, thanks to the influx of capital into the country. But both Hui and Goldman Sach's Hong Liang say it is within China's power to change that perception.

HUI: I think a number of things they could do. First of all, they could look at ways to liberalize their capital accounts and therefore, allow more outflow to counter the inflow of capital, and how they do that. For example, allowing more capital to flow out of the economy, encouraging Chinese companies to invest overseas or even allowing more imports to come into the country.

HONG LIANG, CHINA ECONOMIST, GOLDMAN SACHS: On the principal side, they need to get a stronger domestic market. So China will start to import more. If you look at the past few year`s history whether China is a foe or friend, a trade relationship actually had (INAUDIBLE) less to do with exports, but more to do with imports, so we do think the Chinese need to rise stronger domestic demand .

NGO: One move that's not expected to be in the cards is another one offer valuation of China`s currency, the yuan because analysts believe market forces could boost the yen by as much as 3 percent in the coming months. Hope Ngo, NIGHTLY BUSINESS REPORT, Hong Kong.