Oil reserve fund needed

China should use part of its mammoth foreign reserves for a badly-needed oil reserve fund, says an International Finance News story. The following is an excerpt:

Last year's drastic price fluctuations in the world oil market put China's oil and foreign assets security at risk.

The East Asian nation's gross domestic product (GDP) accounts for 6 percent of the world's total but it now holds nearly a quarter of the world's foreign reserves. More than 60 percent of its foreign reserves are dollar-held, so the continuous interest rate reductions in the US mean declining returns from investment in US government bonds. The current financial crisis exacerbates worries about China's foreign reserve assets.

China ranks as the world's second largest oil consumer. But the country does not have its own special oil reserve fund. The country's huge volume of foreign reserves and its insufficiency in oil storage put its economic development under threat.

The government should use a portion of its huge foreign reserves as an oil reserve fund. Setting up such a fund, which would be used by an assigned agency for oil deals, would contribute to the country's adoption of flexible policy to make an appropriate oil and foreign reserves ratio that can vary with the changing conditions in the global oil market.

The country should take $100 billion, or 5 percent of its total foreign reserves, to set up the oil reserve fund.

The country can use the fund to buy oil when prices are low and then put redundant oil reserves on the market when prices increase, raising the country's returns in both oil and foreign exchange reserves and helping stabilize world oil prices.

Oil is China's largest trade deficit item in terms of single commodity deals, so the country should set up such a strategic oil reserve fund as early as possible.

(China Daily 01/19/2009 page2)