PBoC governor: China needs to reduce FX reserves

PBoC governor Zhou Xiaochuan said China’s FX exceeded US$3tn at end March, way above necessary levels.

In a statement, Bank of America Merrill Lynch said rising FX reserves add big pressures on PBoC’s sterilization.

The global investment banker said China needs to reduce its FX reserves, and improve and diversify its FX management.

"China could consider diversifying FX reserves through sovereign wealth fund like the CIC,” BofAML said.

While the firm shared Zhou’s sentiments about US$3tn in reserves as being “way too much,” it raise the possibility that part of the FX reserves might be from hot money prone to volatility.

According to BofAML’s estimates, among the US$198bn increase of FX reserves in 1Q11, “unexplained” flow could be as high as US$139bn.

The global investment banker said the PBoC needs to scrap its monopoly power to reduce FX reserves.

The SAFE (under the PBoC) is currently under the monopoly of FX manager in China.