“Speaking of the renminbi, a seemingly unrelated but in fact very relevant issue concerns foreign reserves accumulation in China. We all recognise the enormous and difficult task the People’s Bank of China faces in monetary management. The reserve requirement ratio is now at a high of 11.5% (the People’s Bank of China announced an increase of 0.5 percentage points on 18 May) and the interest rate paid on those reserves is currently around 2%, which is below the retail deposit interest rates. The amount of central bank paper issued by the People’s Bank of China for the purpose of sterilisation accounts for over 7% of the total assets of the banking system, currently yielding 3%. These liabilities of the central bank are matched by foreign assets that are probably earning less in renminbi terms, given the appreciation of the renminbi by over 3% against the US dollar in the past year.

There are also issues relating to foreign-reserves management that are common to quite a few jurisdictions in Asia. In jurisdictions where the domestic currencies are appreciating, there is obviously pressure to achieve at least a positive return in domestic-currency terms, and so there is a lot of serious interest among foreign-reserves managers in Asia in diversification, in currency and asset class, and in developing an appropriate institutional framework to perform this rapidly growing task. There are understandably many possible models to achieve this, taking account of domestic characteristics and sensitivities. The international financial community also seems to be keenly interested in developments on this front, whether from a business angle or from concerns over possible impact on the trends of major financial markets. We certainly do not wish to see discussion of this subject leading to sharp adjustments in individual markets or currencies, but this possibility cannot be ruled out.”

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