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China to Stop Accumulating Foreign Reserves

China will stop stockpiling its massive foreign reserves, China's central bank governor Zhou Xiaochuan said in an interview published Tuesday.

In an interview with the Emerging Markets magazine, a Euromoney publication, Zhou was quoted as saying, "Many people say that foreign exchange reserves in China are (already) large enough,".

"We do not intend to go further and accumulate reserves," Zhou said, adding the government will "cut a small piece of reserves" for a new agency to be set up by China's central bank and finance ministry to manage its massive foreign reserves, which have swollen because of the trade surplus.

Zhou also added the agency would begin operating this year and focus on profitability and absorbing liquidity, although he did not say how much money would be passed to it.

But analysts said Zhou might have been misquoted and that China's $1 trillion in reserves will keep growing as long as China intervenes to stop the yuan from appreciating. Beijing has
given no signs of abandoning the practice in the near term.

The U.S. dollar fell sharply against the yen on Tuesday, erasing earlier gains, in a knee-jerk reaction to a report that China would stop stockpiling foreign exchange reserves.

China's premier, Wen Jiabao, said last week that plans to form a new agency to invest part of the country's swollen foreign exchange reserves, the world's biggest at more than $1 trillion, would not have an adverse impact on the U.S. dollar.

China's central bank also said last week it would not significantly adjust the composition of those reserves. A large part of them are denominated in dollars.

As the reserves have ballooned on the back of China's record trade surpluses, demands have grown for part of the hoard to be invested more aggressively.

Investors have long fretted over Beijing's plans to diversify its foreign exchange investments because of their potential impact on global markets. Studies have shown investment by China and other Asian countries in U.S. bonds has reduced long-term American interest rates by as much as two percentage points.

The original interview with Zhou can be found at www.emergingmarkets.org