Big forex shake-up 'needed'

Official wants key role for ministry in the handling of reserves

China needs to reform the management of its massive foreign exchange reserves to address excess leverage in the financial sector, a senior legislator said on Thursday.

Huang Qifan, vice-chairman of the economic and finance committee of the National People's Congress, the country's top legislature, said the current foreign exchange management has jeopardized the country's monetary policy and was part of the reason for the excess liquidity and chaotic activities in the financial sector.

The People's Bank of China, China's central bank, has been the main buyer of the country's foreign exchange and sometimes it was forced to do so to stabilize the value of the Chinese currency.

Such a practice has "hijacked" the central bank's monetary policy, which in turn substantially increased the money supply in the economy, creating excess liquidity and asset bubbles such as surging property prices, Huang said in a speech at an economic forum in Beijing.

He called for immediate reform of the current management of the country's foreign exchange reserves, which stood at $3.11 trillion by the end of last month. He suggested that the country should consider allowing the Ministry of Finance to play a bigger role in the practice.

Guan Tao, a former official at the State Administration of Foreign Exchange and a senior research fellow at the China Finance 40 Forum, said that the stockpile of China's foreign exchange reserves has to do with the country's foreign exchange policy.

"It doesn't really matter if it is the central bank or the Ministry of Finance that manages the foreign exchange as along as policymakers can come up with a proper foreign exchange policy and can avoid the negative impact on monetary policy," he said.

Economists have been expecting continuous two-way fluctuations of the yuan against the US dollar next year.

Sheng Songcheng, an advisor to the PBOC, said that China is expected to keep the value of the yuan stable and the priority of the country's exchange rate policy is to avoid sharp fluctuations in the currency.

He expected the exchange rate of the yuan against the US dollar to float at around 6.6 by the end of the year.

Meanwhile, Sheng said China will maintain its prudent monetary policy stance next year while the country will likely see a rebound in the growth of M2, a broad measure of money supply, after the financial deleveraging measures already took effect.