China needs to
ensure the security and profitability
of its assets
China is
the world's largest holder of
foreign exchange (forex) reserves, which
reached $3.31 trillion in 2012. The annual
growth of its forex reserves alone
would still place China among the
top five countries globally. (By the
end of March, its forex reserves
reached $3.44 trillion.) Even during the
past decade, China's forex reserves
had come under the global spotlight,
and the State Administration of
Foreign Exchange (SAFE), the world's
largest institutional investor, was under
the watchful eye of market
participants around the world. So how
can the Chinese government improve its
management on this
front?
Re-jigging the
mix
Of the four external
assets categories—outbound direct investment
(ODI), portfolio investment, other
investments (including trade credit, loans,
currency, deposit and other assets)
and reserve assets, China's forex
reserves, or assets held by the
government, make up a larger portion.
To upgrade the mix of its
external assets, China must boost its
proportion of the other three
investments, which are privately held
assets.
China has already drawn
up an array of policies and
measures to lower the growth of
its forex reserves and push the
expansion of privately held external
assets, such as facilitating foreign
currency exchange under the current
account and promoting ODI, among other
things.
There is no denying
that these measures have really
worked, from surges in ODI in
recent years to the snapping up
of real estate in the United
States and Cyprus by Chinese.
Nevertheless, the risks Chinese enterprises
and residents have met during their
outbound investments have shown that
it's unnecessary to overstress
increasing privately held forex
assets.
Now that the
restructuring of external assets has
begun, the focus should be on
how to accomplish the transition
smoothly and minimize side
effects.
China is still a
developing country and its currency
has not yet evolved into an
international currency. That is to
say, China is still exposed to
a potential international payment crisis.
For this reason, forex reserves must
be adequate. Whether Thailand, Malaysia
and South Korea during the 1997 Asian
financial crisis, or Russia in the
subprime crisis, all of these
countries worried about excessive inflows
of foreign assets before the eruption
of the crisis.
China should
be on alert. The twin surpluses
of the current account and capital
account were reversed in 2012, and in
the past few years, seasonal and
monthly trade deficits were not rare.
Meanwhile, the repatriation of trillions
of dollars of foreign investments
would bring about huge pressure and
potential risks arising from the
social and economic pressures of
emerging economies may spread to the
Chinese market.
Therefore, in
the foreseeable future, the most
effective way to improve the mix
of external assets is to ensure
the sheer growth of forex reserves
and enhance the ratio of privately
held external assets. In this regard,
the next thing to do is
innovate in the utilization of forex
reserves and improve the returns on
assets.
Management
goals
The purpose of forex
reserves management is to guarantee
its safety, liquidity and profitability.
During the decade when there was
a forex shortage, China tended to
value safety and liquidity more than
profitability. Now, things have changed
and China is free of such
concerns.
However, for fear of
dragging down economic growth and
cramping ongoing industrial restructuring,
China should not blindly curb the
increase of exports and trade
surpluses. Don't expect trade
surpluses and the accumulation of
international assets to be reversed
immediately. China will continue to
increase its forex reserves.
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