MNI: China Top Fin Regulators Divided Over Forex Reserve Mgmnt

     BEIJING (MNI) - China's top financial regulators are divided on whether the

People's Bank of China should transfer management power over China's foreign

exchange reserves to the Ministry of Finance.

     At a financial summit sponsored by Caixin Media on Thursday, Huang Qifan,

the vice director of the National People's Congress Financial and Economic

Affairs Committee, China's cabinet-like financial advisor, said China's foreign

exchange purchase position had "kidnapped" its issuance of the base currency. 

     Huang argued that China's forex reserve system, which is characterized by

the PBOC's dominant supervision, should be reformed and that the Ministry of

Finance should take control of it.

     As the PBOC has been trying to increase China's foreign reserves by issuing

money in order to prevent the depreciation of the yuan over the past few years,

China's M2 growth rate has hit high levels, Huang said. The M2 monthly growth

rate has mostly been in the double digits, although it did drop to below 10% for

the first time this year.

     "Our foreign reserve system is problematic," Huang said. "China not only

needs to reform its financial supervision system, but also its foreign reserve

system."

     He said that if this isn't done, it could lead to higher inflation,

especially of financial assets, and diminish the financial sector's support of

the real economy.

     Huang suggested China learn a lesson from other countries in letting its

fiscal regulator -- the Ministry of Finance -- control 80% to 90% of foreign

reserves, and let the central bank control the rest. Through this method, Huang

said, the Ministry of Finance could earn profits by issuing special treasuries,

as opposed to the present situation, where the central bank lacks effective

investment avenues outside of purchasing foreign countries' treasury bonds.

     He criticized the central banks' lack of efficiency in using foreign

reserves and the lack of efficiency of money usage in China in general, arguing

that the Ministry of Finance could instead transfer the money raised by selling

special treasuries to investment companies owned by the central government. Even

at a return on investment of 5%, Huang said, China could annually bring in

several hundred billion dollars of revenue, which could further supplement

China's huge fiscal expenses.

     "A strong country that stands out financially is not one that lends out

lots and lots of money to other countries, but one that makes global investments

that can create truly high, solid and sustainable returns," Huang argued. 

     Xu Zhong, head of the PBOC's research bureau, rebutted Huang's argument

that the central bank should relinquish control of foreign exchange reserves.

     "The theory sounds very attractive, but the reality" is very different, Xu

said, arguing that it would be unrealistic to make the change.

     He noted that returns on investment by institutions under control of the

Ministry of Finance are actually lower than the current return on investment of

foreign reserves by the central bank.

     Xu added the huge debt burdens of local governments could also consume

profits earned by the Ministry of Finance.

     Xu also said the role of related financial institutions established by the

Ministry of Finance, if it were to be given control over foreign reserve, would

be similar to that of local government financing vehicles (LGFVs) for local

governments. 

     LGFVs are companies set up by local governments, especially after the 2008

financial crisis, for local governments' off-budget financing, after local

governments were prohibited from financing on their own. LGFVs are now regarded

as one of the major risks for China's economic health, as they have fueled

skyrocketing credit growth and threatened financial stability.

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

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