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Party Newspaper Moves to Calm Fears as China Forex Reserves Sink

By Chen Na

(Beijing) — The Communist Party's official newspaper called on Friday for an end to the "outdated mindset" that China needs to hoard foreign exchange reserves, after the country's holdings fell nearly $70 billion last month.

Reserves at the People's Bank of China, the country's central bank, decreased to $3.052 trillion in November, down from $3.12 trillion in October — the biggest slide since January, data from the State Administration of Foreign Exchange (SAFE) showed on Wednesday.

The fifth consecutive monthly decline raised concerns among global markets as the reserves edge closer to what traders believe is a psychological comfort level of $3 trillion.

However, an article carried in People's Daily on Friday questioned the need for the Chinese government to hoard foreign currency.

The article echoed comments by SAFE following the release of the November figures that the erosion in China's stockpile of foreign currency was mostly the result of central bank activity in the foreign exchange reserves market and the dollar's rally.

The U.S. dollar index, which tracks the currency's value against a basket of peers, rose 3.1% in November, lowering the value of China's reserves in other currencies.

It is widely believed that the Chinese government has sought to prop up the yuan's value against the dollar by selling the U.S. currency as the yuan hit a eight-and-half-year low last month.

"Just as grains in a storehouse are to be eaten and not just stared at, foreign exchange reserves cannot always lie in the central bank's account," the article said.

"Whether the decline in the foreign exchange reserves is a cause for concern depends on the current situation and needs" in China, the article quoted researcher Zhang Huanbo as saying. Zhang works at the China Center for International Economic Exchanges, a think tank affiliated with the National Development and Reform Commission.

As Chinese companies and individuals increase overseas investments, in answer to the government's call to "go out," there is a "practical need" for companies and individuals, rather than the central bank, to hold more foreign currency, Zhang said.

While there is no international standard for how much a country should hold in foreign reserves, "judging by any metrics, China's foreign exchange reserves are abundant," the article said.

China's foreign exchange reserves still account for about 30% of total central bank holdings around the world and are 2.6 times those of Japan and 5.7 times Saudi Arabia, the next two largest holders of foreign exchange reserves.

Contact reporter Chen Na (nachen@caixin.com)

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