China defends forex strategy

PUBLISHED : Tuesday, 01 May, 2012, 12:00am
UPDATED : Tuesday, 01 May, 2012, 12:00am


China, the No 1 holder of US debts, has defended its overseas investments, with the country's foreign exchange regulator claiming it made money from its outbound assets every year over the past eight years.

Guan Tao, head of the international balance of payment divisions at the State Administration of Foreign Exchange, said China earned US$128 billion income from its overseas investments in 2011. SAFE controls the country's more than US$3 trillion foreign exchange reserves, the world's largest.

Between 2004 and 2011, outbound assets grew 26 per cent on average and its income rose 32 per cent on average, said Guan in a statement posted on the official website of SAFE. Guan did not elaborate on what kind of investments it had made in the past eight years.

Guan's comments came amid growing public concern on the mainland that Beijing probably invested too much in government bonds in the United States. The US dollar is facing strong depreciation pressure due partly to its interplay with the yuan and the weak US economic recovery from the 2008 global financial crisis that started on Wall Street. In the official SAFE statement, Guan downplayed public concerns about the investments.

Guan said people should not generalise and confuse China's outbound investments with the figures for Chinese investment shown on the international balance sheet, which showed a negative return.

'They are two very different concepts,' Guan said.

'We will continue to actively support domestic institutions and individuals to make overseas investments and let our people hold more foreign exchanges gradually.'

Guan's comments signal that the government is keen to reduce the size of its foreign exchange reserves, though at a stable pace. Guan's explanations however did not convince people on the mainland. Guan's comments on the profitability of China's overseas investments became a 'hot topic' on Sina Weibo, China's most popular micro-blogging service where hundreds of users posted their comments online that they did not believe Guan.

One user said in a posting on Sina Weibo in response to the news about Guan's comments: 'If the number is negative [in terms of investment return] on the international balance sheet, how can you say we are still making profits from our investments outside China?'

An economist with a foreign bank in Hong Kong said Guan's argument could be proved 'technically correct' but Beijing should not ignore the reality that the world's No 2 economy, just behind the United States, is indeed facing rising challenges to guard and make good returns from its overseas investments. The economist declined to be named due to the sensitive nature of the matter.

Beijing has pledged to help a number of European countries including Greece and Spain that are in trouble amid the snowballing debt crisis via investments in their government bonds. That is not popular with ordinary people on the mainland who believe the government should spend more money domestically to solve social problems and reduce the income gap for its 1.3 billion population.

China's foreign exchange reserves have doubled from four years ago, reaching a new high of US$3.3 trillion at the end of March, official data show. Some Chinese officials have said the foreign exchange reserves are becoming too big to manage and the central bank is trying to widen investment channels for the government as well as the public to get money out of the mainland.