China’s US$3.6tn forex reserves becoming an unruly monster

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.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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