China may invest more of its US$769 billion foreign reserves in other currencies, putting pressure on the U.S. dollar, the European Commission said.
"There has been indications that China could begin to diversify foreign-exchange reserves away from U.S. dollar assets, something that could put downward pressure on the U.S. dollar," the commission said in an unpublished report to European governments that was obtained by Bloomberg News.
China has built up record foreign reserves as the central bank bought dollars to limit gains in the yuan. China, the world's fastest growing major economy, is under pressure from the U.S. and Europe to let its currency appreciate as a way of curbing its trade surplus.
The central bank revalued the yuan 2.1 percent on July 21 and began managing it against a basket of currencies. The daily limit of 0.3 percent on fluctuations against the dollar was retained. Since then, the yuan has appreciated 0.5 percent.
China's trade surplus tripled to a record US$102 billion in 2005, the Chinese government said today. China's economy, which the government estimates grew 9.4 percent last year, is poised to replace Britain as the world's fourth largest.
Investors in China, including the People's Bank of China, held US$247.6 billion of U.S. Treasury securities at the end of October, second only to Japan. China's currency regulator said January 4 it plans to "actively explore ways of investing foreign exchange more effectively," without giving details.
The Shanghai Securities News, published by state-run news agency Xinhua, today cited central bank spokesman Sun Hui as saying the country has no plans to reduce its dollar holdings.
"It's highly unlikely they can change the composition by a large amount in a very short period of time" because most of the country's trade is denominated in dollars, said Steven Chang, global markets vice president at State Street Bank & Trust Co in Hong Kong. "The intention is to keep the reserves stable."
Turning to the European economy, the commission said growth is "gaining momentum" and the pickup in consumer confidence increases the chances of a "more optimistic scenario" materializing in 2006.
Global economic conditions are "supportive" of growth in Europe, said the commission, the European Union's economic watchdog said. The US$9 trillion euro economy of the 12 euro nations will expand about 0.6 percent in the first quarter as last year's decline in the euro lifts exports, the commission said, reiterating a forecast made last month.