Mar. 24, 2009 (Xinhua News Agency) -- Analysis: China considers diversifying forex reserve By Jiang Yujuan
BEIJING, March 25 (Xinhua) ? China is considering diversifying its foreign exchange reserve so as to ensure its safety, although U.S. dollar assets are still safe investment for China's forex reserves.
U.S. Federal Reserve announced on March 18 that it would purchase 300 billion dollars of long-term treasuries, and 750 billion dollars of mortgage securities and agency debts in the next six months, in a bid to improve conditions on private credit markets.
When loosing the space for further interest rate cut, the US can only bring paper money printers into full operation to inject fluidity into the market to stimulate economic recovery, US Federal Reserve Chairman Bernanke said bluntly.
Experts hold that the move would force the greenback to depreciate and the price of long-term US treasuries to go up. Experts also agree that it will have limited impact on China's forex reserve in the short run.
Ha Jiming, chief economist with China International Capital Corporation, said that China would get exchange gains from the non-U.S. dollar assets in its forex reserve thanks to weak dollar, while the increase in price of US treasuries would also add value to China's forex reserve in a short term.
But in the long run, when U.S. economy shows recovery, it will incur inflation and induce depreciation of US dollar and price hike in gold, energy and staple goods, posing threats to China's forex reserve, as U.S. dollar assets take up 65 percent of it.
In view of possible risks, experts held that diversifying China's forex reserve investment is the best way to guard against risks.
Premier Wen Jiabao used to say in his London tour in January that China would adjust its holding of U.S. treasuries bonds in accordance with the nation's demand, the safety and the profitability of the forex reserve.
Sun Xiaoxia, an official with the Ministry of Finance, said that currently U.S. assets were still safe investment for China's forex reserve, but the country was considering diversifying its forex reserves investment.
Zuo Xiaolei, chief economist with Galaxy Securities, said that China can employ its forex reserve to promote imports in order to drive domestic investment.
Meanwhile, the government can encourage enterprises to invest in resource-type products overseas, as prices of staple goods would go up in the long run, proposed Ha Jiming.
Hu Xiaolian, vice governor of the People's Bank of China (OOTC:BACHY) , China's central bank, said recently that China will continue investing in U.S. government bonds while paying close attention to possible fluctuations in the value of those assets, adding investing in U.S. Treasury bonds is an important component of China's forex reserve investment.
Li Yang with Chinese Academy of Social Science said that current depreciation of U.S. dollar is only short-term fluctuation. In Europe, exposure of financial crisis is still going on, while in the U.S., the exposure has entered a wind-up period, and measures have been taken to tackle the crisis.
Therefore, in Li's opinion, before the problem of financial crisis is settled, the greenback won't go weak against euro, British pound and other major currencies.
It's still an appropriate choice for China to invest in U.S. treasuries bonds, said Li. But he called on the government to cut holding of long-term bonds and add holding of short-term bonds in order to ensure the asset safety.
China has become more cautious of its investment of forex reserve, and has begun to strengthen its risk control capacity since last year, recent statistics show.
According to the recent U.S. Finance Ministry report, China newly purchased 12.2 billion U.S. dollars of U.S treasuries in January to bring the total to 739.6 billion U.S. dollars, the lowest growth since the second half of 2008.
Of China's newly purchased U.S. government bonds in the fourth quarter last year, 96 percent are short-term treasury bonds, 53 percentage points higher than the third quarter level.
China had sold 92 billion U.S. dollars of long-term U.S. treasury bonds last November to reduce investment risk, said the report.
China's forex reserve hit a record 1.95 trillion U.S. dollars at the end of 2008. It once saw a decrease of 25.9 billion U.S. dollars in October 2008 but soon rebounded in November and December.
Following Chart shows the monthly growth of China's forex reserve in 2008: Chart 1
However, analysts estimated that the absolute value of China's forex reserve might fall by about 30 billion US dollars in January 2009, and forecast that the slipping trend may continue in the coming months, as goods trade contributes to nearly half of China's forex reserve.
