MNI: China SAFE's Lu Stresses Forex Reserves As Stabilizer

     BEIJING (MNI) - The function of China's foreign exchange reserves is not

only to serve as an investment vehicle, but also to help stabilize the economy

and the financial sector, Chinese State Administration of Foreign Exchange

(SAFE) Deputy Director General Lu Lei stressed Wednesday.  

     Lu, speaking at the Caijing conference here, appeared to be attempting to

rebut calls by a top Chinese legislative official to shift foreign exchange

reserve management from SAFE, an arm of the PBOC, to the Ministry of Finance to

improve investment returns on those reserves.  

     Huang Qifan, vice director of the National People's Congress Financial and

Economic Affairs Committee, and financial advisor to the central government,

earlier this month criticized the PBOC's management of China's more than $3

trillion in foreign exchange reserves and the lack of efficiency of Chinese

monetary policy in general. He argued China should not lend out large amounts of

money to other countries by buying their government securities but instead make

strategic global investments that produce high, solid and sustainable returns.

     Huang proposed that the Ministry of Finance issue treasury bonds to raise

funds to purchase foreign exchange from banks and firms, arguing that its

reserve management would be more efficient and lucrative than the central bank's

current practice of buying low-yield foreign securities. The PBOC's practice of

creating money to buy foreign exchange had led to asset inflation and damaged

the economy, Huang charged. 

     But Lu argued that the proposed MOF foreign exchange purchase mechanism

carried risks. 

     "I'm very concerned about the maturity of bonds, their characteristic as a

long-term investment vehicle and fixed-period investment, which are not

compatible with the need for promptness in buying foreign exchange" Lu said.

"I'm afraid [selling bonds to buy foreign exchange] would not benefit the

market." 

     Lu stressed that foreign exchange reserves play an important

counter-cyclical role adjusting for cross-border capital flows, which should be

taken into account in discussing the management of those reserves.

     He noted that China's foreign reserves have fallen to a bit more than $3.1

trillion currently from a peak of $3.99 trillion to meet the foreign exchange

needs of the real economy for trade and investment.

     The 19th Communist Party Congress stressed the importance of serving the

real economy and forestalling a financial crisis, Lu noted, arguing that more

risks would arise as China continues to open up. 

     "One of the very important risks during China's opening up would come from

unreasonable fluctuations of the foreign exchange market," Lu said, adding that

exchange rate fluctuations are affected by large capital flow fluctuations, not

only in the financial sector but also in the real economy.

     The PBOC's current "double-pillar" monetary policy and macro-prudential

policy stance are important for China's macro-economic management, Lu said.

China needs to create innovative monetary policy tools and maintain balance

between providing a stable policy environment and stable economic targets, he

added.

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: iris.ouyang@marketnews.com

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