Commodities inflation could rise rapidly if China follows the advice of one of its central bank officials, who recommends spending forex reserves on strategic resources such as oil. The move would further China’s diversification from the dollar.
Many emerging economies, such as Indonesia, list commodity inflation as a principal risk to continued economic recovery.
Sheng Songcheng, director of a municipal branch of the People’s Bank of China, said the investments could be made by professional investment firms buying forex from the central bank.
The means may be new but the end is longstanding. Beijing has repeatedly expressed its intention to diversify away from low-yielding US government securities, which make up the bulk of its foreign exchange reserves.
Existing methods include injecting foreign exchange into China Investment Corp, China’s main sovereign wealth fund, and indeed a further injection – of about $200bn – is expected in the coming months. CIC was relatively aggressive last year in buying commodities companies, and the planned injection is seen as a reward for success. State-owned companies have also pursued a range of mining and oil acquisitions and partnerships abroad.
China has the world’s largest foreign exchange reserves, which increased by $326bn in the first nine months of 2009, to total $2,273bn.
