Bill Zhang

Friday, January 06, 2006

China eyes better yields from forex reserves

China plans to "optimize the structure" of its record US$769 billion foreign-exchange reserves as it seeks higher returns, the country's currency regulator said.

The State Administration of Foreign Exchange plans "to actively explore ways of investing foreign exchange more efficiently," Hu Xiaolian, director of the agency, said in a statement on its Website after an annual working conference held yesterday. It didn't give details of any changes.

Chinese investors including the central bank owned US$247.6 billion of US Treasuries at the end of October, the world's second-largest foreign holder after Japan. China won't change its "set policy" of buying treasuries, Finance Minister Jin Renqing said in Beijing on October 13.

"I don't expect them to outright sell dollars — that would lead to a crash, which would hurt China," said Marios Maratheftis, a currency strategist at Standard Chartered Plc in London. "It may signal a less aggressive accumulation of dollar reserves." China should invest its foreign exchange reserves in overseas energy resources rather than US Treasuries, Zheng Xinli, deputy director of China's Central Policy Research Office, said on September 22.

China on July 21 ended the yuan's decade-old peg to the US dollar, replacing the peg with a link to a basket of currencies including the euro and yen. The dropping of the peg fueled speculation that China may slow purchases of US dollars that it used to keep the exchange rate stable.

The regulator also said it will scrap foreign-exchange quota limits on outbound investments by domestic companies, part of an ongoing liberalization of the country's capital account controls. Companies will still need permission to invest abroad. The regulator in May 2005 raised the investment Chinese companies can make to US$10 million from US$3 million per project overseas.

In addtion, Hu said that achieving a balance of international payments is of great significance to the healthy development of the Chinese economy. However, problems such as bigger foreign trade surplus and an imbalance of international payments still exist in China's rapidly growing economy, he said.

The conference, held to promote the balance of international payments, was told SAFE would improve the management of foreign exchange in current accounts and facilitate trade and investment in 2006.

SAFE will make further progress in the foreign exchange market and improve the managed, floating exchange rate regime.

In this way, SAFE will improve financial services for small foreign exchange deals, encourage financial institutions to make innovations in commodities and services and enhance monitoring and management of market risks, the conference heard.