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    China Business
     Aug 2, 2011

China drives up yen
By Hussain Khan

TOKYO - China's holdings of marketable securities surged fourfold to 13.84 trillion yen (about US$173 billion) at the end of 2010. The figures are based on Japan's international balance of payments.

Equities holdings increased to about 3.42 trillion yen from 10.1 billion yen within a span of one year during 2010. During the same period, holdings of Japanese government bonds (JGB) surged threefold, to about 10.50 trillion yen from 3.42 trillion yen. The total increase of about 10.41 trillion yen was so great that it accounted for about 60% of Japan's surplus in its current balance of payments.

The investments also helped to drive up the value of the Japanese currency against the US dollar, the euro and other currencies, an appreciation that involved other factors such as falling interest

rates and the quantitative easing policy of the Federal Reserve Bank in the United States. The yen has appreciated by more than 33% against the US dollar since January 2007 and almost 13% since January 2010. It has gained about 3.85% this year.

China, like all other investors, suffered losses due to the Lehman Brothers bankruptcy in 2008 and the market crash related to the American subprime housing loans fiasco. Since the start of 2009 it has sought to diversity its investments, turning its attention to Japan on recognizing that stocks there were undervalued after 20 years of deflation in the country.

It started to build up investments on a large scale at the beginning of 2010. China Investment Corp, a Chinese sovereign wealth fund, invested about just under two thirds of its total fund of $300 billion in Japan. The track record of one of its investment vehicles, the Australia-based OD05 Omnibus fund, shows that it keeps buying new shares without cashing in past stock investments. According to one estimate, the fund had an unrealized profit worth 175.8 billion yen by the end of February 2011.

Foreign investors were net buyers of Japanese equities to the extent of 3.2 trillion yen, according to a Tokyo Stock Exchange report, which means China accounted for the bulk of net buying of Japanese equities that year.

Other data show that the most bulk foreign buying of JGBs in 2010 was from various central banks rather than by individuals or private funds - and mainly the China central bank.

China has distributed a small fraction of its US$3.2 trillion dollar foreign reserves to several global asset management companies, such as Goldman Sachs, BNP Paribas, BlackRock, State Street Bank, Alliance Bernstein, AXA Rosenberg and others. More than $1 trillion each are managed by three of them.

It is difficult to ascertain exactly out how much from these global asset management companies' buying actually belongs to China. In the United States, every foreign government has to file a report to its stock exchange if it buys equities worth $100 million or more. There is no such requirement in Japan.

It is possible that the increase in Chinese investment in Japan may be much more than the roughly 10.5 trillion yen indicated in Japan's balance of payments statistics for last year. Investment from Hong Kong surged twofold to about 2.41 trillion yen, and from Singapore nearly fourfold to about 5.52 trillion yen. Much of this appears to be investments from China.

China has assumed a dominant position in purchasing resources in African and other countries and of stocks, bonds and private real estate elsewhere, as its foreign reserves climb - at $3.2 trillion they dwarf those of Japan's $1.1 trillion.

In addition to shares, Chinese money - through the country's sovereign wealth fund, wealthy individuals and companies - is also buying real estate in Japan, which is trickier to trace. A boom in the number of Chinese tourists to Japan brings more Chinese money into the country.

The huge inflow of Chinese capital in various forms to Japan means increased demand for yen, and the possibility of further increases in the Japanese currency's value is encouraging investors to park their money in yen marketable securities.

The yen's appreciation last year and in the first half of 2011 and is going to continue during the next few years, as in addition to capital inflow from China, there are several other factors as well contributing to its appreciation.

The stronger currency helps cut costs to Japan and its industries of imports oil and other natural resources on which its manufacturing might depends. However, it also makes its exports of completed products more expensive and less competitive - increasing pressures to move factories overseas and improve productivity at home.

Hussain Khan holds a master's degree in economics from Tokyo University and has worked in Japan as an equities analyst. He is an independent Tokyo-based analyst on current affairs and economic issues for various newspapers and magazines and he is a specialist on the Japanese economy. He can be contacted at cj@ourquran.com.

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