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2 China aims to spend $200bn of
reserves By Zhou Jiangong
cracked. The MOF, along with the
PBoC, will lead an emerging multi-tier foreign
exchange reserve management system.
Meanwhile, the SAFE will also set up an
overseas company to prudently invest in low-risk,
long-term Treasury bonds and housing mortgage
bonds denominated by the US dollar and the euro.
The SAFE will still control at least 60% of the $1
trillion reserves after the diversification.
Central Huijin, nominally the PBoC's
investment arm, will continue
to
manage tens of billions of reserve dollars it has
injected into three of the "Big Four" state
lenders: ICBC, BOC and CCB.
This year, it
is estimated that Central Huijin will inject about
$25 billion to $30 billion into the last of the
"Big Four", the Agricultural Bank of China (ABC),
to help restructure it into a joint-stock
corporate in preparation for going public. ABC's
restructuring is to be decided at the Central
Conference on Financial Affairs.
Reserve
dollars have helped Central Huijin emerge as an
empire of state financial asset control. It also
controls the country's biggest securities
brokerages and indirectly controls the biggest
mutual funds. Central Huijin has just announced
that it will inject $4 billion into the China
Reinsurance Group to take a 92% controlling stake,
while the MOF is taking the remaining 8%.
The National Social Security Fund (NSSF)
headed by former minister of finance Xiang
Huaicheng is also eyeing a slice of the foreign
exchange reserve. But a suggestion that a chunk of
the reserve be allocated to the NSSF was firmly
rejected by Wu Xiaoling, the deputy governor of
PBoC. In general, the idea of allocating part of
the reserve to any existing financial institution
or government department for the purpose of
investment has been discarded.
The scale
of the MOF's planned bond issuance is so huge that
it has to be done phase by phase. In so doing,
pressure on market liquidity can be alleviated.
Although the market is awash in liquidity, the
issue needs to be in line with monetary policy.
Some analysts suggest that the government
adopt a Japanese practice: the Ministry of Finance
issues home-currency denominated bonds to buy
foreign exchange flowing into the country. The
purpose of the policy is to separate the
burgeoning money supply from the increasing
foreign exchange reserves.
The Japanese
Ministry of Finance is responsible both for fiscal
policy and monetary policy. But the mandates of
the MOF in China are limited to fiscal policy and
the supervision of financial assets management.
The PBoC oversees monetary policy. Yet the
issuance of government bonds concerns both the
country's fiscal and monetary policy. Therefore,
it requires improved coordination between the MOF
and the PBoC, whose relationship has long been
tense.
The market is also worried that the
MOF could incur losses from the operation since it
risks holding hundreds of billions of US dollars
that will likely depreciate in coming years. But
analysts in Beijing policy circles believe that
the government is considering hedging the risk.
They say that with the MOF's bond
issuance, more than 1.5 trillion yuan will be
drawn from the country's banking system to reduce
commercial banks' liquidity.
However, some
analysts point out the potential shock effect the
operation could have on the stock markets. If 1.5
trillion yuan is absorbed by the bond issuance,
the market could face a "liquidity shock".
Many concerns have surfaced. Can the
markets bear the shock? Will the purchase of $200
billion be completed in one year or in three
years? What will the terms of the bonds be?
Ha Jiming, chief economist at
International Capital Corporation Limited,
dismissed this concern. "Nowadays, liquidity
inside the banking system is more than sufficient.
If the government bonds are issued phase by phase,
the due bank notes issued by the PBoC and the new
base money from the purchase of the foreign
exchange will allow the market to absorb the
pressure."
If the 1.5 trillion yuan is
drawn from the banking system in three years, the
market could bear the impact on liquidity, many
analysts say.
Zhou Jiangong is a
Shanghai-based analyst on China's economic,
political, and foreign affairs.
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