China plans to be more creative managing its $3.2 trillion of foreign currency reserves

Reuters – China will manage its $3.2 trillion of foreign currency reserves more creatively to ensure “effective” results, its central bank said on Monday, as it vowed to work harder to free the country’s tightly controlled financial markets.

In a wide-ranging statement highlighting its goals for 2012, the People’s Bank of China (PBoC) promised to reduce state control over China’s interest rates and currency markets to allow market forces to have a bigger play.

“Continued efforts will be made to manage China’s reserve assets with new ideas and in a more effective manner,” the central bank said before its annual press conference on Monday.

Beijing wants the yuan, also known as the renminbi, to be basically convertible by 2015 when it will trade with fewer government restrictions, in the hope that it lays the ground for China’s ambitions to be a global financial centre by 2020

But many analysts argue much still needs to be done, saying China needs to free its interest rate market before it frees its currency. Some are sceptical that China has the political will to push through rate reforms that may hurt the health of its giant state-owned banks.

Many investors expect Beijing to further relax policy by lowering banks’ reserve requirement ratio as the world’s No. 2 economy cools and price pressures wanes.

Expectations of a policy response from Beijing were entrenched on Friday by the first major flurry of hard economic data of the year, which revealed an easing in the pace of industrial output, inflation, fixed asset investment and retail sales.

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