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2 China aims to spend $200bn of
reserves By Zhou Jiangong
SHANGHAI - The Chinese government is
taking action to implement a new policy of
diversifying the disposal of the country's over
US$1 trillion foreign exchange reserves which was
initiated by the Central Conference on Financial
Affairs three weeks ago.
The Ministry of
Finance (MOF) is planning to issue
yuan-denominated bonds to raise funds that will be
used to "buy out"
as
much as $200 billion from the country's foreign
reserve pool.
To take funds out of the
foreign exchange reserves the government must pay
the equivalent amount in yuan to balance the
books.
At the current exchange rate, the
total amount of yuan bonds to be issued by the MOF
will be more than 1.5 trillion yuan. The ministry
plans to sell the bonds to commercial banks,
according to China Business News, a leading
business newspaper based in Shanghai.
The
$200 billion "bought out" from the foreign
exchange reserves will then be injected into a new
company to be set up this year to handle overseas
investment with foreign reserves.
The new
company, tentatively named National Foreign
Exchange Investment Company, will be controlled by
the State Council, China's cabinet. It will spend
funds from the foreign reserves on mergers and
acquisitions of overseas businesses, including
foreign financial institutions. It will also
target overseas energy assets and will likely
acquire equities in the domestic markets, or even
lend money to help finance domestic research and
development projects.
Informed sources say
that Lou Jiwei, currently vice minister of
finance, will be appointed as board chairman of
the National Foreign Exchange Investment Company.
The new company will be a ministry-level
body and as such its creation needs to be
rubber-stamped by the National People's Congress
(NPC), China's parliament. According to Chinese
law, bond issuance by the MOF also needs the NPC's
approval. Therefore, both the establishment of the
investment arm and the issuance of bonds are
expected to be on the agenda of the NPC's annual
session, which begins next month.
If the
MOF decides to issue yuan-denominated bonds, which
could happen this year, 1.6 trillion yuan would be
taken back from the market.
The new
company represents a victory for the Ministry of
Finance in the battle for foreign exchange assets
management. Some researchers close to
decision-makers estimated that the new company
could manage about $200 billion.
The new
policy to diversify the disposal of the country's
huge yet growing foreign exchange reserves is also
bound to change China's current foreign exchange
management regime, which is dominated by the State
Administration of Foreign Exchange (SAFE).
According to the People's Bank of China,
(PBoC), the central bank, the SAFE is responsible
for the stewardship of the largest foreign
exchange reserves in the world. It is estimated
that over 60% of the reserves are invested in US
Treasury bonds, with an annual return rate of
about 3.5%.
It is risky to put all eggs in
one basket. Also, the expected appreciation of the
yuan is worrying the Chinese government. If the US
dollars depreciate against the yuan by 5% this
year, which is almost certain, the reserves will
"shrink" by $50 billion against the yuan,
equivalent to the amount of capital the Central
Huijin Investment Co has injected into Industrial
and Commercial Bank of China (ICBC), Bank of China
(BOC) and China Construction Bank (CCB).
Such concerns finally prompted Beijing to
decide to reform the management of its foreign
exchange reserves.
It is now widely
speculated in Beijing financial circles that the
SAFE's dominance in the foreign exchange regime
will be
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