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 [转帖]Managing China’s Forex reserves---(Clear minded opinions) |
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youhighness
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作者：youhighness 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
Managing China’s forex reserves
Stuart Larkin writes on the appropriate level for China's increasing foreign exchange reserves which will soon reach US$1 trillion, most of it invested in US Treasury bonds.
CHINA recently announced that its foreign exchange reserves at the end of May stood at US$900bil and are set to reach US$1 trillion before year end. For officials at the People’s Bank of China (PBOC), one trillion of reserves will herald a triumph in their longstanding position of “the more foreign exchange reserves the better”.
For many others, it is a potent symbol of national power and a source of national pride. However, for protectionist-inclined US Congressmen, it is evidence of systematic currency manipulation by the Chinese to secure unfair competitive advantage in international trade.
But, since many of these reserves are invested in US treasury bonds, many more thinking people are struck by the absurdity of a relatively capital-poor developing country such as China making huge low interest loans to the US, and especially when the US currency has depreciated so markedly in recent years.
The maintenance of high reserves comes at huge cost that China can ill-afford and this part of national assets should be redeployed for national economic development.
Once foreign exchange reserves have satisfied the needs of imports, fluidity of capital and security, the surplus should be transferred to a National Development Fund (NDF), where greater attention can be paid to investment returns and national development.
Such funds should be managed in the private sector by a new Chinese financial institution that would instantly be the world’s largest fund management company, the greatest of all the “Chinese National Champion enterprises”.
Chinese entrepreneurs, pursuing a legitimate business opportunity, will be the driving force behind the project, drawing upon their “guanxi” with the Standing Committee of the Politburo to differentiate themselves from competing financiers.
The appropriate level for China’s foreign exchange reserves
Foreign exchange reserves are the foreign currency deposits, securities and gold held by national banks of different nations. China’s ballooning foreign exchange reserves are usually attributed to trade surpluses and foreign direct investment (FDI) but speculative “hot money” and government intervention in the yuan may also be factors.
From 1998-2004, China’s foreign trade has been in reasonable balance, with moderate annual surpluses of US$20bil-US$30bil but in 2005 it soared to US$100bil. The authorities point to a sharp decline in imports growth, a structural factor as FDI, particularly from multinational corporations, has drastically increased production and sales in China, substituting for imports.
Chinese construction laborers work on the 54th story under construction at the Shanghai World Financial Center building. China’s foreign exchange reserves set to reach US$1 trillion before year-end. – APpic
But for some US observers, the huge US bilateral trade deficit with China, which soared to US$202bil in 2005, is the result of an undervalued yuan.
To thwart an appreciation of the yuan to maintain China’s international competitiveness for export growth, the Chinese authorities have intervened in foreign exchange markets to buy dollars, so adding to reserves.
One analyst has estimated this intervention at US$2bil-US$3bil a day. The inflow of “hot money” seeking to benefit from an upward revaluation of the yuan is another factor. One analyst has suggested this amount - much of it supposedly hidden in falsified export receipts - could be as great as US$67bil.
Guo Shuqing, the director general of state administration for Foreign Exchange Management explains official attitudes: “.... as an item of international payments, the growth of foreign exchange reserves is the result of macroeconomic operation, but not the objective China is particularly pursuing.
“An adequate foreign exchange reserve is favourable for payment abilities, comprehensive national power and credit worthiness, reducing risks of reform and safeguarding financial security”.
China’s National Bureau of Statistics advances two reasons for holding reserves. First, foreign exchange reserves are necessary as a defence against currency speculation, and serve as funds for economic reforms. Second, they are a necessary condition for promoting the yuan as an international currency.
But China’s foreign exchange reserves far exceed those necessary for meeting international payments. This is quantified later. There is no clear-cut relationship between foreign exchange reserves and national power - it is a mercantilist view based on the relationship between trade surplus and reserves when many of the world’s largest economies such as US, France and Britain do not hold large reserves.
Large reserves do reassure overseas lenders that the risk of debt default is lower but the country may, nevertheless, incur a negative interest rate spread - in China’s case, the cost of overseas borrowings is higher than the low yields on US treasury bonds.
Reserves are a useful source of funds for reform, for example, US$45bil was used to recapitalise a couple of state-owned banks in 2003, but this is an alternative use for reserves.
Promoting the yuan as an international currency is not presently feasible since the fragility of the banking system precludes opening up the capital account of the balance of payments, a precondition for a flexible exchange rate system. (China describes its exchange rate system as a “managed float” but yuan behaviour suggests a de facto fixed exchange rate pegged to the dollar.)
Countries often keep reserves because they fear speculation and economic shocks might affect their exchange rates, and they want to be able to keep their rates steady. Reserves can be used by the country’s central bank to purchase its own currency in an intervention.
Devaluation raises the costs of repaying foreign-denominated debt and raises the costs of importing goods, raising the spectre of inflation. The irony in China’s case at the moment is that speculative flows anticipate a rise in the value of the currency rather than a fall.
Reserves growth may not be a specific government objective but it is an important criterion for career assessment among the relevant departments within the PBOC. Hence the bureaucratic culture is a major driving force behind the continued growth of the reserves.
A closer look at the costs involved of holding vast foreign exchange reserves needs to be taken. It is thought that of China’s US$900bil reserves at end-May, US$262.6bil was invested in US treasury bonds, making China the single largest lender to the US Government after Japan. This contributes to the lower-than-otherwise interest rates in the US, which is not only a subsidy to the wealthy American consumer but also a subsidy to China’s export competitors elsewhere in Asia.
China does not enjoy a positive interest rate spread investing in US treasuries because its rates are much lower than in the US. The bonds that China has invested in mainly have a fixed nominal return rate of 4%-5%.
If inflation and depreciation of the dollar are taken into account, the real rate of return is only 0.7%-1.7%. This compares with the World Bank Pension Fund’s average rate of return over the last 10 years of 8% nominal per annum.
Exposure to the depreciating dollar has been costly. In 2003, 82% of China’s reserve assets were in dollars and, in 2004 this exposure was reduced to 76%. One analyst takes a 12% decline in the dollar against the euro between November 2002 and August 2004 and suggests that, if 60% of reserve holdings were in dollars, then China would have suffered a loss of US$53bil.
Some Chinese economists are calling for an increase in the country’s gold reserves, which have changed little since 2002, at 600 tons. They argue that gold reserves need to be quadrupled to 2,500 tons to their historic proportion of 3%-6% of total foreign reserves.
Perhaps gold’s rightful proportion would be restored if reserves were drastically cut to establish a NDF dedicated to raising investment returns and promoting national economic development.
It should be remembered that gold, like stockpiles of other commodities, has no yield and that there are costs related to storage, security and insurance to be borne. And what are the prospects for capital gains when buying at a 25-year high?
The government plans to build strategic reserves of key minerals such as uranium, copper, aluminium and iron ore needed for “adjusting the market, coping with emergencies and guaranteeing security of resource supplies”.
China is already building reserves of crude oil, natural gas, coal and gold. Some buffer stocks for emergencies are prudential.
But, at the end of the day, Chinese industry must adjust fully to market prices for these commodities and the PBOC should avoid speculating on commodities by building up physical stockpiles.
Producers can use futures markets to hedge against adverse price moves when planning future production. For guaranteeing security of resource supplies, taking strategic equity stakes in resource companies may be more effective.
Foreign exchange reserves, like infrastructure and production facilities, need to be managed in relation to the country’s total assets with an overall balancing of risk and return. The PBOC is unable to see the big picture as it is focused only on foreign reserves. Central banks are conservative institutions by nature and they are still likely to prioritise stability at the expense of development.
To free up national assets for development, the decision for an appropriate level of reserves needs to be taken at Government level. However, there are well-established principles and standard international practice to guide that judgment.
There are four principles involved in determining the appropriate level for foreign exchange reserves. First, the reserve should satisfy the demand for 3-4 months of imports, or account for around 10% of GDP. Second, it should satisfy the need for debt repayment, at least for short-term debts. It should also ensure the smooth flow of short-term capital and should help keep monetary policy stable to promote macroeconomic development.
The value of 3-4 months of imports is US$103.2bil-US$137.6bil (US$412.8bil total in 2005). On this measure, reserves are presently almost seven and a half times higher than necessary. GDP for 2005 was around US$1,760bil, so reserves at 10% of GDP would be US$176bil.
So, China’s reserves are presently over five times larger than necessary on this criterion, being more than 50% of GDP. At the end of 2005, China reported a surplus of foreign debt of US$281.1bil, of which short-term debt surplus was US$156.1bil. Taking the conventional ratio, reserves presently cover the short-term debt surplus by 5¾ times.
On these criteria, the appropriate level for China's foreign exchange reserves is certainly below US$200bil. Thus, on estimates of year-end reserves of US$1tril, there is US$800bil that could be transferred to a new NDF.
The writer is a Bangkok-based independent policy and investment researcher.
作者：youhighness 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
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 [转帖]Managing China’s Forex reserves---(Clear minded opinions) -- youhighness - (11380 Byte) 2006-11-01 周三, 05:11 (1415 reads)
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