The Washington Post

Dubai crisis gives China chance to buy oil, gold: report

November 30th, 2008

By: Reuters

Dubai's debt crisis could be China's opportunity to snap up gold and oil assets, a senior Chinese official said in remarks published on Monday.

No Chinese banks have yet reported exposure to debt from Dubai World, a flagship firm that last week said it was seeking to delay debt payments by six months. Some Chinese real estate and construction firms have limited exposure to projects in the emirate, state television reported this weekend.

China's $2.27 trillion in foreign exchange reserves are mostly parked in U.S. treasuries, despite calls from some in China to invest the reserves in oil and other natural resources that the fast-growing Chinese economy will need in future.

While the impact of the Dubai crisis on the global economy and on China was not known yet, it would last a while at the very least, Ji Xiaonan, who chairs the supervisory board for big state-owned companies under the State Council's state assets commission, told the Economic Information Daily.

"That could give China a buying opportunity to put some forex reserves into gold or oil reserves," Ji was quoted as saying by the paper, which is widely read by Chinese officials.

Another paper, the China Youth Daily, quoted Ji as saying that a team of experts from Beijing and Shanghai had set up a task force last year to look at the issue of gold reserves.

"We suggested that China's gold reserves should reach 6,000 tons in the next 3-5 years and perhaps 10,000 tons in 8-10 years," the paper quoted him as saying.

That is in line with many officials' view that China should decrease the proportion of its $2 trillion foreign exchange reserves held in dollar-linked investments and raise its gold holdings to diversify its portfolio.

For a graphic on the world's top gold reserve holders:
http://graphics.thomsonreuters.com/119/GLD_TP121109.gif

China last acknowledged a change in its national gold holdings in April, when Hu Xiaolian, head of the State Administration of Foreign Exchange (SAFE), told Xinhua news agency that the country's reserves had risen to 1,054 tons from 600 tons since 2003.

But it did so by buying domestically produced gold to help soak up unsold output. It has not yet shown any interest in buying from international gold markets.

"If the gold price comes down for a while, we might take the opportunity to buy a bit," the Economic Information Daily, run by Xinhua news agency, quoted economist Li Yining as saying.
Li added that China must gradually diversify the asset and currency composition of its foreign exchange reserves. He recommended buying more land, mines and equity stakes in companies.

Wu Nianlu, a professor at the central bank's graduate school, expressed concern about the safety of China's non-bond holdings.

"Strictly speaking, almost half of our country's foreign exchange reserve is not stable in value and is of high risk," Wu was quoted as saying by the same paper.

(Reporting by Lucy Hornby, Langi Chiang and Tom Miles; Editing by Sue Thomas)

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