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--Says PBOC Strategy Safeguards Country's Assets
BEIJING (MNI) - The primary purpose in managing China's foreign-exchange
reserves is to stabilize the currency's exchange rate and dampen capital outflow
risks, with profiting from the reserves a secondary focus, according to a senior
official at the People's Bank of China.
Sheng Songcheng, a PBOC counselor and former director of its Survey and
Statistics Department, said at a closed-door speech in Beijing on Tuesday that
"security and liquidity" are the main aims of the PBOC. "The primary goal ... is
not to think about profitability," Sheng said.
The earning power of China's $3 trillion-plus forex pile has come under
recent debate, with some analysts and officials arguing that the PBOC should
diversify away from its preference for low-yield U.S. government bonds.
How the PBOC actually manages the largest forex stash in the world is a
closely guarded secret, and the regulator has never released any public
information on its management strategy. According to China International Capital
Corporation (CICC), a state-owned investment bank, U.S. dollar-denominated
assets accounted for 66.7% of the forex reserves portfolio in 2016, which is
slightly higher than the 63.6% of U.S. dollar-denominated bonds held as a
percentage of global forex reserves.
The yield on the 10-year U.S. government bond currently stands at 2.32%,
compared with the 3.985% of its counterpart in China.
Huang Qifan, vice chairman of the Financial and Economic Affairs Committee
of the National People's Congress, said last week during the Caixin Summit in
Beijing that the central bank's forex reserve management strategy was
unproductive, as it focused on low-risk liquid assets such as treasury bills.
Huang also said the PBOC's forex management had led to a number of financial
problems, including excessive money supply and asset bubbles, and had thus
"hijacked" the central bank's monetary policy.
According to Sheng, though, Huang's view "is a huge misunderstanding of
China's basic currency structure and monetary policies."
Sheng argued that the central bank had made the decision to invest mainly
in U.S. government bonds in order to safeguard the country's assets and maintain
a strategic hold over management of the economy. Money supply, Sheng stressed,
serves the central bank's monetary policy and occurs as a result of economic
stability and development.
"The system of money creation has changed in China as the forex purchase
position has continued to decrease in recent years, which has restricted the
growth of money supply," Sheng said. "Therefore, the PBOC relies on money-market
instruments, including open-market operations, the Standing Lending Facility,
and the Medium-term Lending Facility" to guarantee money supply.
The foreign-exchange purchase position of the PBOC edged up slightly in
October for the second straight month to CNY22.22 trillion, but that was after
22 consecutive months of declines.
In the balance sheet of the PBOC, the item of "Claims on Other Financial
Corporations," which gauges lending from the central bank to financial
institutions, increased to 27.2% of total PBOC assets in October, compared with
4.4% in the June 2014, when forex reserves hit a peak of $3.99 trillion. This
indicates that the PBOC has tended toward a reliance on money-market instruments
to inject liquidity into the interbank market.
Sheng attributed China's huge forex reserves to the need for maintaining
stability of the yuan, which he said has resulted in China playing a bigger role
in world trade.
China has now become the biggest trading country in the world, in part
because it has strictly controlled appreciation of the yuan since it entered
into the World Trade Organization in 2001, Sheng said. "The persistent purchase
of forex has been for the stabilization of the yuan exchange rate," Sheng
Huang, meanwhile, has argued that the Chinese government should entrust the
Ministry of Finance to manage forex reserves, instead of the PBOC, in order to
get higher returns on the locked-up wealth. "The Ministry of Finance could issue
government bonds and entrust organizations including CICC to make investments
with the forex reserves, which would make over a trillion yuan in annual
income," Huang said.
But Sheng countered this argument by saying "the PBOC had allowed the
Ministry of Finance to issue CNY1.55 trillion in Special Government bonds in a
bid to buy $200 billion worth of forex reserves in 2007. The ministry later
invested in CICC" -- an investment strategy that did not prove to be successful.
"It increased the government debt ... and even could have triggered
inflation, so it was not a proper way to manage forex reserves," Sheng argued.
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