Πηγή: Xinhuanet
by Lu Hui
2011-08-22
Analysts hold diversifying China's forex investments, transforming economic growth model and pushing forward RMB internationalization as the ways to manage its huge reserves and shake off overdependence on dollar in the long term.
According to the statistics released by the U.S. Treasury Department on Aug. 15, the total U.S. debts held by foreign creditors in June decreased by 16.8 billion dollars than last month, but China’s holdings increased for the fourth consecutive month, being the largest foreign creditor with around 1.17 trillion dollars.
Japan, the second-largest holder of US Treasuries, reduced its holdings by .4 billion dollars, leaving them at 911 billion dollars. Britain boosted its holdings from May's 346.8 billion dollars to 349.5 billion dollars.
Investing in U.S. debts a rational move
China has been closely watched for its investments in dollar assets, especially when the downgrade of the U.S. credit rating by Standard and Poor's from its top-notch AAA to AA-plus put the value of China’s holdings into uncertainty.
Analysts widely believe that China has few options other than to continue buying United States Treasury bonds, as the American market has long been considered the safest and most liquid bond market in the world.
As far as the size and liquidity are concerned, there is, for the time being, no substitute for the U.S.bonds in the market. The European and Japanese markets are not big or liquid enough to absorb China’s fast-accumulating foreign exchange reserves.
Therefore, investing in U.S.debts is a rational move and excessive worries over the safety of the foreign reserves are unnecessary, they agree.
Zhou Donghai from the Ministry of Finance said from the perspective of revenue maximization, investing in U.S. assets is still the safest as the prices of U.S. debts are still stable "even after the downgrade of U.S. credit rating. "
Days after the credit rating cut, U.S. treasury bond prices soared and the ten-year bond yields fell to as low as 2.33 percent in New York.
“So, from the point of view of assets allocation, it is indisputable for China to buy U.S. treasury bonds as it is in line with investment logics,” said Zhou.
Zhou's opinion was echoed by Guo Shuqing, chairman of China’s Construction Bank, who said that even if buying the U.S. debts has certain risk, but considering the severe fluctuation of global economy and debts-ridden euro zone, U.S. debts are still the best investment with the combination of safety and profitability.
Yuan Gangming, a researcher at the Center for China in the World Economy at Tsinghua University, said the purchasing of US Treasuries reflects China's limited choice regarding its 3.2 trillion dollar foreign exchange reserve.
"Increasing the holdings despite the slow economic recovery in the US and signs of looming debt problems is 'choosing the best of a bad bunch', meaning there are no better places for China to put such a large amount of money," Yuan said.
Although the US economy has been overshadowed by the rating downgrade, the country's fundamentals in the long term remain strong, Yuan added.
Talking about the consequences if China pulled back from buying treasuries, analysts warn that in that case the dollar would weaken and America’s borrowing costs would rise sharply and as a result, China’s existing holdings would get hurt.
"A large-scale sell-off of U.S. debts would cause the devaluation of China’s holdings and this is like nothing but committing suicide,” they warned.
Ma Jun, the chief economist of Greater China region of Deutsche Bank, saw that other national debt markets can not compete with the U.S. in terms of depth and liquidity, therefore lacking the capacity to hold the China’s large forex reserves.
"For instance, the scale of Germany’s national debts market is only 14 percent of that of U.S. Many euro zone countries, such as Spain and Italy, faced with much higher risk of defaults than U.S. So, buying U.S. debts is a better choice than buying euro zone debts," Ma further explained.
Ma also warned that China’s move to reduce its holdings of U.S. dollar assets would cause the panic selling throughout world market that could result in the crash of dollar exchange rate, the sharp rise of U.S. interest rate and recession of U.S. economy. "Consequently, this will cause the decline of demands for Chinese products by the OECD countries, thus battering the China’s economy itself."
Safe message sent
Standard & Poor downgraded the U.S. credit rating from its top-notch AAA to AA-plus just days after the U.S. government narrowly escaped an unprecedented debt default.
It was the first time that the U.S. credit rating was downgraded since it received an AAA rating from Moody's in 1917. The United States has held the S&P rating since 1941.
Though chances for a full-blown U.S. default are still slim now, the S&P downgrade serves as a warning shot about the long-term sustainability of the U.S. government finances.
China has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets.
To quell China’s worries about safety of dollar assets, U.S. Vice President Joe Biden pledged to ensure the safety of China's investment in the United States and its holdings of dollar assets during his meeting with Chinese Premier Wen Jiabao in Beijing on Friday.
Biden said the United States will ensure the safety of its debt not only for the sake of China, but also for U.S. citizens, who own 85 percent of the country's total debt.
Responding to China’s disquiet about U.S. creditworthiness, new U.S. ambassador Gary Locke also said at a press conference in Beijing that President Barack Obama and Congress had mapped out a "path ensuring fiscal integrity of the United States."
"It's a clear indication that investment in the United States is safe, secure and that the economy, while having its challenges, is still strong," he said.
To avert potential risks from burgeoning dollar assets, analysts hold the view that China should diversify its foreign reserves and slash holdings.
"Gold probably tops the list, besides euro-denominated assets and debt of the emerging markets," said Yao Wei, China economist with Societe Generale in Hong Kong.
"The share of gold in China's foreign exchange reserves is significantly lower than other countries. The pace of diversification will be subject to the situation in global financial markets and China's own currency reform."
China's foreign exchange reserves hit 3.2 trillion dollars mark in June, but the data published by World Gold Council in July indicated that China has only 1,054.1 tons of gold reserves, accounting for 1.6 percent of China’s total forex reserves. The proportion of Germany is 71.7 percent and 74.7 percent for the U.S. For Russia and India, the proportion is all above 5 percent.
Zhu Zhiqun, a professor of political science and international relations at Bucknell University in Pennsylvania, said China should be "more creative" and diversify investments.
"Chinese companies can help failing US businesses through acquisitions and purchases. The US Congress is likely to block Chinese investment in key sectors related to US national security, such as the oil industry, but it is not opposed to Chinese investment in less sensitive businesses," Zhu said.
Song Guoyou, professor of American research center of Fudan University, shared his view that though it’s hard, "we must quicken the step of diversifying forex investments."
"Except buying emerging countries’ assets, we can also purchase crude oil, minerals and other strategic reserve resources. In addition, we can provide loans for friendly nations, which can yield much higher profits both strategically and substantially than those of U.S. debts," Song stressed.
In fact, China has in recent years been seeking to diversify some of its foreign exchange reserves away from the U.S. Treasury debt and into other investments, including euro-dominated debt.
Since the outbreak of Europe's debt crisis in 2009, China has been buying bonds from Spain and other European nations, according to China's commerce ministry. During Chinese Premier Wen's trip to Europe in late June, China offered to buy some of Hungary's sovereign debt and provide a special loan of 1 billion euros (about 1.44 billion dollars) to support joint ventures between enterprises from the two countries.
Transform economic growth model
Market analysts hold that it is truely hard to find safe and profitable investment varieties for China’s massive foreign exchange reserves. "The key is to reduce the trade surplus and transform the economic growth model from the export-driven to domestic consumption driven."
“Basicly, China should reduce the forex reserves in a gradual manner through transforming economic growth model,” said Chen Zhiwu, professor of Yale University.
Zhang Ming, with the China's Academy of Social Sciences, emphasized that "we should transform the growth model through structural adjustment and curb the continuous accumulation of forex reserves by reversing double surplus."
"If the country's foreign exchange reserves continue to grow at a fast pace, there is little chance of getting out of the cycle," Ken Peng, senior China economist with BNP Paribas said. "You have to do something with the accumulated dollars."
Regarding the ever-expanding forex reserves, the State Administration of Foreign Exchange (SAFE) said that China would take comprehensive measures to push forward economic structure readjustment and transform economic growth model as to ease the pressure of capital inflow, facilitate the balance of international payments.
Pushing forward internationalization of RMB yuan
Analysts share the view that from the long term, China should accelerate the process of turning the RMB yuan into an international currency in a move to reduce dollar dependence.
“The only way out to get rid of dollar hegemony and U.S. debts pitfall is to produce a substitute for U.S. dollar and U.S. debts” said Xiang Songzuo, deputy director of currency research institute of Renmin Univeristy,
“Euro came into being as Europe wanted to shake off the overdependence on U.S. dollar. So, the long-term strategy for China is to internationalize RMB, in an effort to make yuan a real international reserve currency, which can match up with U.S. dollar,” Xiang added.
Xiang further explained that for the short term, China should reduce the dollar holdings and separate parts of the forex reserves to the nationals and allow them to invest overseas. "Many countries, including Britain, Japan and U.S have such experiences in managing their forex reserves," he added.
With a rash of new preferential policy measures announced by the central government during Chinese Vice Premier Li Keqiang's visit to Hong Kong, the SAR is expected to get a major boost as an offshore RMB center in the not too long future, which will accelerate the process of turning the RMB yuan into an international currency and find better ways to enhance the safety of China's international money.
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