BEIJING, Dec. 16 -- The foreign exchange reserves could exceed US$1 trillion by the end of 2006 unless domestic demand kicks in to reduce the country's trade surplus, a leading government researcher said in remarks published Thursday.

    Ba Shusong, vice head of the financial research institute at the State Council¡¯s Development Research Center, said in an interview with the Financial News that the trend toward greater flexibility of the yuan was entrenched.

    The dollar¡¯s yield premium created a favorable environment for yuan exchange rate reform by deterring speculative inflows, especially as the chances of an increase in Chinese interest rates next year was practically zero, Ba said.

    But the pace of change would depend on whether China managed to hand the baton of growth from exports to domestic demand.

    ¡°If this shift does not occur based on current growth trends, foreign exchange reserves could top US$1 trillion by the end of next year,¡± Ba said.

    The reserves stood at US$769 billion at the end of September.

    He said the appreciation of the yuan alone would not succeed in correcting China¡¯s growing trade surplus with the United States, which needed to tackle the imbalances in its economy by increasing its savings rate. Enditem

    (Source: Shenzhen Daily/Agencies)