China’s US$3.6tn forex reserves becoming an unruly monster
November 12, 2013 Leave a comment
China’s US$3.6tn forex reserves becoming an unruly monster
Staff Reporter
2013-11-10
At US$3.6 trillion, China’s forex reserves have become a major headache, not a symbol of national power. According to the State Foreign Exchange Administration, China’s forex reserves increased by US$301.7 billion in the first three quarters this year and may top US$400 billion for the whole year. The number will triple 2012’s US$130.4 billion, assuming the renminbi continues at its expected revaluation.An official from the administration warned that a further increase in the reserves will throw the balance of payment askew, constrict policy flexibility, and slow down market reform.
How to utilize the huge reserves has become a major challenge to the Chinese government. According to the Chinese-language Economic Observer, Lin Caiyi, chief economist of Guotai Junan Securities, pointed out that “the challenge facing the central bank is how to utilize the forex reserves in overseas investments, for higher yields, and lower the cost for managing domestic liquidity.”
According to the central bank, the nation’s outstanding foreign exchange funds stood at 25.4 trillion yuan (US$4.2 trillion) as of the end of Sept, 268.2 billion (US$44 billion) higher than a month earlier and contributing 260 billion yuan (US42.6 billion) to domestic liquidity.
The remninbi outlook remains strong in the short term, with the medium exchange rate of the currency reaching 6.1425 yuan to US$1 on Oct. 31. An official of the administration noted that the ultimate goal for the diversification reform of forex reserves is storing forex holdings in the hands of the private sector.
The US Fed’s decision to continue purchasing bonds at US$85 billion a month will boost global liquidity. JPMorgan Chase estimates that global excess liquidity, already at record highs, will rise further. So far this year, global M2 supply — a broader definition of money supply — has increased by US$3 trillion, two thirds originating in emerging markets, notably China. Consequently, in the short term China’s forex reserves will grow further, forcing the central bank to purchase strong currencies passively.
Over the past several years, the Chinese government has utilized mounting forex reserves through multiple outlets, including debt claims, equity, sovereign bonds, and corporate bonds, in both mature and emerging markets.
During 2004-2011, average investment returns for China’s forex reserves amounted to 3.3%, compared with 4.3% of the US, 3.8% of Germany, 3.4% of Japan, 3% of the UK, 2.3% of Brazil, and 2.5% of South Korea.
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