China's trillion-dollar investment
blues By Antoaneta Bezlova
BEIJING - As China's foreign exchange
reserves continue their explosive growth,
questions about the ways the country's financial
mandarins manage its pool of wealth are growing
both inside and outside China.
While
Beijing wants safe investments that are stable in
the long term, Chinese leaders face domestic
pressure to utilize the country's hoard of foreign
currency to further its economic and strategic
interests, even if it means diversifying the
holdings into
more risky but
higher-yielding investments.
Reserves
topped US$1.2 trillion by the end of last month,
confirming China's status as the world's biggest
holder of foreign exchange reserves. What is more,
they continue to climb by more than $20 billion a
month on the back of China's ever-growing trade
surplus.
How China decides to use its
newly acquired wealth has ramifications for
financial and commodities markets worldwide, as
was made evident by last year's jump in the price
of gold following reports that China was preparing
to buy huge quantities of it.
In the past,
Beijing has tapped its massive reserves to
recapitalize the country's biggest domestic
financial institutions, pumping some $60 billion
into three of China's four big
government-controlled banks.
With foreign
exchange reserves rapidly growing over the past
five years, government officials feel the country
now has enough financial resources to counter
potential external shocks and can be more daring
in investing its funds.
In March, the
government announced its decision to entrust some
$200 billion to $300 billion of its reserves in
the hands of a new, as yet unnamed investment
agency. Analysts suggest that if given enough
authority, the new body could deploy hundreds of
billions of dollars to acquire financial or
strategic assets around the world, particularly in
the developing countries of Africa and Latin
America.
Long conservative about its
external investments, China is perceived as a
rather cautious money manager that would emphasize
safety over profitability.
Chinese Premier
Wen Jiabao has said the goal of the new agency
will be to "preserve and increase" the value of
China's foreign exchange holdings and suggested it
would take a conservative approach.
"China's diversification of its foreign
exchange reserves is based on considerations of
the safety of that foreign exchange," Wen said at
the close of the annual session of China's
legislature in March.
Wen's remarks were
directed at those predicting that China's plans
for global investment might upend the
international financial order.
Most of
China's currency reserves are invested in US
dollar-denominated debt, such as US Treasuries,
earning a low but steady return. Some in
Washington and world markets fear that China might
decide to suddenly dump its dollar holdings,
setting off a tidal wave of sales and imperiling
the US economy.
But while sounding
confident about the country's investment moves,
Chinese leaders face domestic concerns that the
reserves, believed to be invested for the most
part in those low-risk, low-return US Treasuries,
are not used more productively to deliver benefits
for China.
"China is a big developing
country with a huge population but inadequate
resources," said Liu Yuhui, an expert at the
Finance Research Institute under the Chinese
Academy of Social Sciences. "Acquiring oil fields,
mines and even arable land could all become viable
channels for investing the available funds to help
sustain the country's development."
This
is an argument heard not only among academics but
China's top officials as well. Last December, the
official press agency Xinhua quoted China's Vice
Prime Minister Zeng Peiyan as saying that part of
the Chinese foreign currency reserves will be used
to buy vital resources like coal, iron and oil.
Others have suggested that the money
should serve "patriotic purposes" by furthering
the interests of China's state-owned companies
abroad. A report in the Shanghai Securities News
proposed utilizing some of the funds to make
strategic investments for national energy
enterprises like China National Offshore Oil Corp
or acquiring foreign technology to facilitate
China's modernization.
However, many are
aware that such a strategy could provide
ammunition for further accusations concerning the
nature of "China Inc". In 2005, China's failed
attempt to buy US oil company Unocal caused a
protectionist backlash, with some in the US
Congress suggesting that Beijing was financing its
aggressive shopping spree with funds acquired in
the process of keeping the home currency
undervalued.
Guo Tianyong, a banking
expert at the China Central Finance and Economics
University, said only the establishment of a
specialized investment agency can ward off such
dangers.
"What we face now is that the
slightest rumor about China's intended purchase of
commodities can drive up prices instantaneously.
Without a proper investment vehicle that would
operate in conditions of commercial secrecy, we
can easily be at a disadvantage and pay higher
prices," he said.
Many officials have
hinted that Beijing's new investment vehicle would
mirror Temasek Holdings, the Singapore
government's investment arm, which manages a huge
portfolio of government funds.
Guo
Tianyong, however, suggested that China is
unlikely to allow markets total freedom in
deciding the best potential investments. "If the
new investment agency behaves totally like a
market enterprise it cannot fully realize its
potential to deliver benefits to the people," he
said. "Sooner or later, as shown with Temasek,
there would be a clash of interests. This is what
we, in China, would like to try and avoid."
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