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2 China seeks new ways to spend $1
trillion By Zhou Jiangong
SHANGHAI - China has finally decided to
diversify disposal of its huge yet steadily
growing foreign-exchange reserve by investing in
overseas markets, a dramatic departure from its
current practice of putting most of its eggs into
one basket - US Treasury bonds.
The
decision was made at the all-important Central
Conference on Financial Affairs, which ended on
Saturday.
A state-owned company will be
set up to invest the Asian
powerhouse's US$1 trillion
foreign-exchange reserve in overseas markets.
In his keynote speech to the conference,
Premier Wen Jiabao said the government "will
strengthen the management of foreign-exchange
reserves and actively explore, and broaden,
channels and manners for making use of the
reserves".
The conference, the third in
the past decade and a half, has been proclaimed by
Wen as the "turning point" for the country's
financial industry.
Most economists and
analysts in China have agreed that the country now
has too much foreign reserve. They argue that the
appropriate amount - a figure that would not cause
internal and external imbalances - could be set at
about $700 billion. That means China now has an
excess of $300 billion that could be used for
overseas investment.
China currently puts
most of its foreign reserves in US dollar assets,
particularly in US Treasury bonds. In this way,
when the Chinese currency steadily revalues
against the greenback, the foreign reserve is
"shrinking" on the book when converted into yuan.
The yuan has gained more than 5% against the
dollar since July 2005, which means the loss in
book value could be up to $50 billion.
Diversifying investment would help reduce
the risks involved in managing the huge foreign
reserve.
Informed sources say that the new
company handling foreign-reserve investment will
be derived from the Central Huijin Investment Co.
As the investment arm of the central government,
Huijin has made its name by injecting reserves of
tens of billions of dollars into state-owned banks
and other financial institutions.
Huijin
holds shares in the Industrial and Commercial Bank
of China (ICBC), Bank of China (BOC) and China
Construction Bank (CCB). It also controls the
country's biggest securities brokerages and
indirectly controls the biggest mutual funds.
Huijin has just announced that it will inject $4
billion in China Reinsurance Group, giving it a
92% controlling stake, while the Ministry of
Finance takes the remaining 8%.
The
high-profile conference only decided in principle
to diversify foreign-reserve investment. Before
China actually invests its foreign reserves
overseas, operational rules to implement the
policy are expected to be worked out by relevant
government departments.
The conference
delegates also tried to settle a turf war between
ministries over which one would oversee individual
financial sectors. Top financial regulators
currently include the People's Bank of China
(PBoC), China Banking Regulatory Commission
(CBRC), China Insurance Regulatory Commission
(CIRC), and China Securities Regulatory Commission
(CSRC). Thus when a bank is allowed to operate
insurance and securities brokerage businesses, it
is under the supervision of the four regulators.
While discussion on the proposal of
setting up a super-body overseeing the operation
of banking, insurance and securities brokerages
was shelved at the conference, the State Council
has pledged to "strengthen the mechanisms of
supervision and coordination" in the financial
industry.
Competition for the control of
state financial assets between the PBoC and the
Ministry of Finance (MOF) has also been well known
among China's decision-makers and financial
officials.
At this conference, it appears
that the MOF's efforts to dominate the supervision
and management of state financial assets has been
thwarted. Another powerful department, the
National Development and Reform Commission (NDRC),
is also losing its control over financial affairs.
Both have financial divisions employing dozens of
bureaucrats, compared with hundreds of
counterparts in the four financial regulators, a
lot of whom are sophisticated bankers and
financial experts with degrees from prestigious
universities in the United States and Europe.
For a while NDRC, PBoC and CSRC have
competed for the job of supervising the issuance
of enterprise bonds. The conference has made it
clear that the CSRC continues to be the one
overseeing the issuance of enterprise bonds for
financing the state enterprises and infrastructure
projects. Meanwhile, CSRC has also taken the
mandate of approving the issuance of
corporate
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