China may dump greenback from its foreign currency reserves ZHOU XIN AND EADIE CHEN Reuters November 7, 2007 at 7:37 AM EST BEIJING China delivered a one-two punch to the dollar as a top lawmaker suggested a bigger role for the euro in its $1.43-trillion (U.S.) hoard of foreign reserves and a central banker said the dollar is losing its global currency status. The euro hit a record high above $1.47 following remarks on Wednesday by Cheng Siwei, vice-chairman of the standing committee of the National People's Congress, China's parliament, pointing to diversification of the country's reserves. In terms of the structure of our foreign exchange reserves, we should take advantage of the appreciation of strong currencies to offset the depreciation of weak currencies, Mr. Cheng told a financial forum. For example, in the current foreign reserves structure, I mean the bonds we bought, the euro is appreciating against the yuan while the U.S. dollar is depreciating against the yuan. So we should make a balance between the two, Mr. Cheng said. Mr. Cheng's position gives him influence in Beijing, where he holds a rank equivalent to vice premier. However, he does not have real authority over financial matters and has been known to speak on a range of subjects, from the stock market to foreign acquisitions, on which he does not control policy. Questioned later by reporters, Mr. Cheng said: I didn't mean we should buy more euros. What I mean is that we should take advantage of the strengthening euro to compensate for weakening currencies. He did not elaborate. China does not disclose the composition of its reserves, but Glenn Maguire, an economist with Societe Generale in Hong Kong, estimated that China holds 65-70 per cent of them in dollars and a much smaller share in euros. In a note to clients, he said Mr. Cheng would most probably be familiar with, though not privy to, policy discussions on the exchange rate mechanism and the foreign exchange reserves. If China were indeed to balance its FX reserve holdings between the dollar and the euro, this would represent a massive selling of dollars and buying of euros, Mr. Maguire wrote. Xu Jian, vice head of the People's Bank of China's Communist Party school, twisted the knife by saying recent surges in gold and oil were a reflection of the dollar's loss of standing. The U.S dollar's global currency status is shaky and the creditworthiness of dollar assets is falling, Mr. Xu, who said he was speaking in a personal capacity, told the same forum. He said he expected the dollar to weaken further in 2008 under the impact of the gaping U.S. trade deficit. That could push the price of gold to $1,000 an ounce from a 28-year peak of $840 scaled on Wednesday, Mr. Xu said. The dollar has weakened significantly against the euro in the past several weeks, following two interest rate cuts by the U.S. Federal Reserve and worries about the economic impact of the meltdown in the subprime mortgage market. The yuan has risen nearly 9 per cent against the dollar since it was revalued by 2.1 per cent against the U.S. currency in July 2005 and unpegged to float within managed bands. To the rising anger of many European politicians, the euro by contrast has risen 9.2 per cent against the yuan over that period. Mr. Cheng said that China would not bow to foreign pressure to let the yuan rise much faster. He cited the example of the 1985 Plaza Accord, which engineered a sharp rise in the yen. Mr. Cheng said this ushered in a decade of deflation in Japan, showing that the search for international currency compromises may bring unwanted results. Therefore, the exchange rate issue is a sovereign issue, and we must consider it mainly from our own point of view, he said. Cheng said Beijing needed to dampen international expectations that the yuan will keep rising, saying this mindset was more dangerous than a stronger yuan itself.