Fed's Exit Strategy Crucial For China's Forex Reserves: Ex-PBoC Adviser

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The real value of China's foreign exchange reserves will be eroded unless the Federal Reserve implements an exit strategy successfully, said Yu Yongding, a former adviser to the People's Bank of China.

In a speech delivered in Melbourne, Yu, a member of the Chinese Academy of Social Sciences, said the "inevitable" decline of the dollar may erode China's holdings of U.S. Treasuries.

China, the world's biggest holder of forex reserves, is the biggest creditor of the U.S. Yu noted that China needs to reduce its current and capital account surplus, or it should divert its forex reserves away from the U.S.

He warned that China's current loose monetary policy is paving the way for another asset bubble. Yu said the way the Chinese government addressed the financial crisis last year has only helped to increase the country's resilience on investment as a source of growth. Citing the huge gap between the massive growth rate of monetary supply and economic growth, Yu said China would face very large inflationary pressure.

The real value of China's foreign exchange reserves will be eroded unless the Federal Reserve implements an exit strategy successfully, said Yu Yongding, a former adviser to the People's Bank of China. (Market News Provided by RTTNews)