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Not enough forex reserves to spare
Source: Agencies |
November 18, 2011, Friday
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Print Edition
Print Edition
EUROPEANS searching for a bazooka to blast away eurozone debt problems might well eye China's US$3.2 trillion foreign exchange arsenal with envy, but Beijing has far less firepower available than many assume.
Most of money in the world's biggest store of forex reserves is prudently kept in near-cash instruments to fund import and debt service bills in the event of an unforeseen domestic emergency, or invested in long-term assets that, if sold in size to help Europe, would spark panic on global financial markets.
In fact, analysts reckon China's armory has only about US$100 billion to spare.
"The sheer size of China's foreign exchange reserves is massive, but the actual amount of money available for investing in Europe each year isn't that big," said Wang Jun, an economist at CCIEE, a top government think-tank in Beijing.
A crucial constraint is China's existing holdings of United States Treasury securities. China is by far the biggest foreign holder, with an estimated 70 percent of the nation's reserves held in US government bills, bonds and other dollar assets. Turn outright seller and the market value of the remaining holdings is likely to plunge.
That's not a great investment strategy given the Chinese public's unhappiness about the roughly 38 percent decline in the nominal value of the dollar in the last 10 years.
The government also may have to set aside some forex reserves to bail out the banking system if piles of loans to local governments and the property sector turn sour.
China injected nearly US$80 billion in reserves into its big state banks from 2003 to 2008 to help them clean up their balance sheets so they could float shares.
Meanwhile, China's trade surplus, essentially the money it has to invest overseas, is shrinking as Beijing does what critics in the developed world have been urging for years and rebalances its economy away from exports.
Imports surged 28.7 percent year on year in October and the surplus of US$17 billion was short of the US$24.9 billion forecast by economists.
Beijing holds an estimated one-quarter of its reserves in euro-denominated assets, so keeping that steady implies a US$117.5 billion increase this year if the country's forex reserves grow by the US$470 billion estimated in 2011.
That's the amount economists expect China to invest in Europe in 2012.
"Assuming the FX reserve accumulation does not slow significantly, I think China will put at least US$80-US$100 billion in euro assets per year in the next two years," said Wei Yao, China economist at Societe Generale in Hong Kong.
Forex assets recycled
China recycles forex assets into overseas investments so outflows of cash roughly track inflows.
The build-up in forex reserves, a result of the central bank's intervention to limit the yuan's appreciation, tends to fuel inflation pressures even as the central bank issues bills to mop up the amount of local currency it pumps into the economy.
And it explains why foreign reserves cannot easily be used for domestic spending on infrastructure or shoring up pension systems, since simply converting the cash risks driving up both inflation and the value of the yuan.
In any case, Beijing won't be eager to sell some of its US Treasuries to buy euro government bonds since officials would effectively crystalize losses near the bottom of one market only to load up on another asset set to plunge in value.
China has been decidedly cool about adding substantially more to its existing holdings of bonds from the European Financial Stability Facility as eurozone officials seek to leverage up its crisis fighting firepower to 1 trillion euros (US$1.7 trillion) from around 440 billion euros.
The tens of billions of euros that European banks need to repair their balance sheets could be another way for China to assist in the recapitalization of the bloc's financial system, if lenders decide to sell loan books to raise cash.
"Assets of some European banks could fall and that will make them attractive for Chinese banks," said Zhao Xijun, an economics professor at the Renmin University in Beijing.
And there's always the institutional investor's favorite in times of crisis - physical assets.
Chinese direct investment in the European Union was 900 million euros in 2010 - less than a fifth of the EU's investment into China at 4.9 billion euros.
Most of money in the world's biggest store of forex reserves is prudently kept in near-cash instruments to fund import and debt service bills in the event of an unforeseen domestic emergency, or invested in long-term assets that, if sold in size to help Europe, would spark panic on global financial markets.
In fact, analysts reckon China's armory has only about US$100 billion to spare.
"The sheer size of China's foreign exchange reserves is massive, but the actual amount of money available for investing in Europe each year isn't that big," said Wang Jun, an economist at CCIEE, a top government think-tank in Beijing.
A crucial constraint is China's existing holdings of United States Treasury securities. China is by far the biggest foreign holder, with an estimated 70 percent of the nation's reserves held in US government bills, bonds and other dollar assets. Turn outright seller and the market value of the remaining holdings is likely to plunge.
That's not a great investment strategy given the Chinese public's unhappiness about the roughly 38 percent decline in the nominal value of the dollar in the last 10 years.
The government also may have to set aside some forex reserves to bail out the banking system if piles of loans to local governments and the property sector turn sour.
China injected nearly US$80 billion in reserves into its big state banks from 2003 to 2008 to help them clean up their balance sheets so they could float shares.
Meanwhile, China's trade surplus, essentially the money it has to invest overseas, is shrinking as Beijing does what critics in the developed world have been urging for years and rebalances its economy away from exports.
Imports surged 28.7 percent year on year in October and the surplus of US$17 billion was short of the US$24.9 billion forecast by economists.
Beijing holds an estimated one-quarter of its reserves in euro-denominated assets, so keeping that steady implies a US$117.5 billion increase this year if the country's forex reserves grow by the US$470 billion estimated in 2011.
That's the amount economists expect China to invest in Europe in 2012.
"Assuming the FX reserve accumulation does not slow significantly, I think China will put at least US$80-US$100 billion in euro assets per year in the next two years," said Wei Yao, China economist at Societe Generale in Hong Kong.
Forex assets recycled
China recycles forex assets into overseas investments so outflows of cash roughly track inflows.
The build-up in forex reserves, a result of the central bank's intervention to limit the yuan's appreciation, tends to fuel inflation pressures even as the central bank issues bills to mop up the amount of local currency it pumps into the economy.
And it explains why foreign reserves cannot easily be used for domestic spending on infrastructure or shoring up pension systems, since simply converting the cash risks driving up both inflation and the value of the yuan.
In any case, Beijing won't be eager to sell some of its US Treasuries to buy euro government bonds since officials would effectively crystalize losses near the bottom of one market only to load up on another asset set to plunge in value.
China has been decidedly cool about adding substantially more to its existing holdings of bonds from the European Financial Stability Facility as eurozone officials seek to leverage up its crisis fighting firepower to 1 trillion euros (US$1.7 trillion) from around 440 billion euros.
The tens of billions of euros that European banks need to repair their balance sheets could be another way for China to assist in the recapitalization of the bloc's financial system, if lenders decide to sell loan books to raise cash.
"Assets of some European banks could fall and that will make them attractive for Chinese banks," said Zhao Xijun, an economics professor at the Renmin University in Beijing.
And there's always the institutional investor's favorite in times of crisis - physical assets.
Chinese direct investment in the European Union was 900 million euros in 2010 - less than a fifth of the EU's investment into China at 4.9 billion euros.
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