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At the end of September 2011, China’s outstanding external debt (excluding that of Hong Kong SAR, Macao SAR, and Taiwan Province) reached USD697.164 billion. Specifically, the outstanding registered external debt was USD440.564 billion and the balance of trade credit between enterprises was USD256.6 billion. With respect to the term structure, the outstanding long- and medium-term external debt (with the remaining term) was USD189.539 billion, accounting for 27.19 percent of the outstanding external debt. The outstanding short-term external debt (with the remaining term) was USD507.625 billion, accounting for 72.81 percent of the outstanding external debt. Specifically, the outstanding registered short-term external debt (with the remaining term) was USD251.025 billion and the balance of trade credit between enterprises was USD256.6 billion. In terms of the composition of the short-term external debt, at the end of September 2011 the balance of trade-related credit was USD374.996 billion, accounting for 73.87 percent of the outstanding short-term external debt (with the remaining term). Specifically, the trade credit between enterprises and bank trade financing accounted for 50.55 percent and 23.32 percent respectively. As trade-related credit is mainly based on real import and export trade, the growth of such payments is basically consistent with that of import and export trade in China; therefore, the increase in the proportion of this short-term external debt will not affect the security of China’s external debt. In terms of types of debtors, the outstanding debt of Chinese-funded financial institutions was USD209.605 billion, accounting for 47.58 percent of the outstanding registered external debt; the outstanding debt of foreign-funded enterprises was USD132.027 billion, accounting for 29.97 percent; the outstanding debt of foreign-funded financial institutions was USD54.373 billion, accounting for 12.34 percent; the outstanding sovereign debt borrowed by ministries under the State Council was USD38.597 billion, accounting for 8.76 percent; the outstanding debt of Chinese-funded enterprises was USD5.797 billion, accounting for 1.31 percent; and the outstanding debt of other institutions was USD 165 million, accounting for 0.04 percent. In terms of types of debt, the balance of international commercial loans amounted to USD370.998 billion, accounting for 84.21 percent of the outstanding registered external debt, with the proportion rising by 4.23 percentage points compared with the end of 2010. The balance of foreign government loans and of loans granted by international financial organizations amounted to USD69.566 billion, accounting for 15.79 percent. In terms of the currency structure, debt in U.S. dollars accounted for 75.81 percent of the outstanding registered external debt, representing an increase of 5.4 percentage points compared with the end of 2010. Debt in Japanese yen accounted for 8.11 percent, representing a decline of 0.45 percentage point compared with the end of 2010. Debt in euro accounted for 7.21 percent, representing a rise of 2.8 percentage points compared with the end of 2010. Other kinds of debt, including SDRs and HKD, accounted for 8.87 percent, a decline of 7.75 percentage points compared with the end of 2010. In terms of the sectors in which the debt is invested, based on the Industrial Classifications of the National Economy, USD53.482 billion was invested in the manufacturing sector, accounting for 24.24 percent of the medium- and long-term outstanding registered external debt (based on contract terms); USD27.677 billion was invested in the transportation sector, the warehousing sector, and the postal-services sector, accounting for 12.54 percent; USD17.354 billion was invested in the production and supply of electric power, coal, gas, and water, accounting for 7.87 percent; USD8.152 billion was invested in the information technology services sector, accounting for 3.69 percent; and USD10.69 billion was invested in the real estate sector, accounting for 4.85 percent. From January to September 2011, medium- and long-term external borrowing totaled USD33.948 billion, an increase of USD6.101 billion, or 21.91 percent, on a year-on-year basis; Repayment of the principal totaled USD20.961 billion, an increase of USD3.057 billion, or 17.07, percent, on a year-on-year basis; Interest payments totaled USD1.779 billion, a year-on-year decrease of USD252 million, or 12.41 percent. Net inflows under the outstanding long- and medium-term external debt totaled USD11.208 billion, up 41.66 percent on a year-on-year basis. 2012-01-04/en/2012/0104/1020.html
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The SAFE recently released the Preliminary Data on China’s Balance of Payments Statement for the Third Quarter of 2011. The current account and the capital and financial account posted a “twin surplus” in Q3 of 2011, and international reserves maintained their growing momentum. In Q3, the surplus under the current account totaled USD57.8 billion. Specifically, according to the statistical coverage of the balance of payments, the surpluses in goods and current transfers reached USD85.3 billion and USD6.9 billion respectively, whereas the deficit in trade in services and income amounted to USD20.2 billion and USD14.1 billion respectively. Meanwhile, China’s surplus under the capital and financial account (including net errors and omissions) totaled USD33.9 billion. In particular, net inflows of direct investments amounted to USD35.9 billion. International reserve assets posted an increase of USD91.7 billion. Specifically, transactions in foreign exchange reserve assets registered an increase of USD92.1 billion (exclusive of the influence of non-transactional changes in value such as changes in the exchange rates and prices), the reserve position in the IMF registered a decline of USD300 million, and special drawing rights registered a decline of USD100 million. In the first three quarters of 2011, China’s surplus under the current account totaled USD145.6 billion and the ratio of the surplus under the current account to GDP was 3.0 percent. Meanwhile, this year China’s surplus under the capital and financial account totaled USD229.8 billion (including net errors and omissions). China’s international reserve assets posted an increase of USD375.4 billion. 2012-01-18/en/2012/0118/1024.html
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The SAFE recently released the Preliminary Data on China’s Balance of Payments Statement for the Third Quarter of 2011. The current account and the capital and financial account posted a “twin surplus” in Q3 of 2011, and international reserves maintained their growing momentum. In Q3, the surplus under the current account totaled USD57.8 billion. Specifically, according to the statistical coverage of the balance of payments, the surpluses in goods and current transfers reached USD85.3 billion and USD6.9 billion respectively, whereas the deficit in trade in services and income amounted to USD20.2 billion and USD14.1 billion respectively. Meanwhile, China’s surplus under the capital and financial account (including net errors and omissions) totaled USD33.9 billion. In particular, net inflows of direct investments amounted to USD35.9 billion. International reserve assets posted an increase of USD91.7 billion. Specifically, transactions in foreign exchange reserve assets registered an increase of USD92.1 billion (exclusive of the influence of non-transactional changes in value such as changes in the exchange rates and prices), the reserve position in the IMF registered a decline of USD300 million, and special drawing rights registered a decline of USD100 million. In the first three quarters of 2011, China’s surplus under the current account totaled USD145.6 billion and the ratio of the surplus under the current account to GDP was 3.0 percent. Meanwhile, this year China’s surplus under the capital and financial account totaled USD229.8 billion (including net errors and omissions). China’s international reserve assets posted an increase of USD375.4 billion. 2012-01-04/en/2012/0104/1019.html
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The SAFE recently released China ’s International Investment Position as of the end of June 2011. The statistics reveal that at the end of June 2011 China’s external financial assets hit USD4615.2 billion, external financial liabilities reached USD2630.1 billion, and external net financial assets totaled USD1985.1 billion. Among the external financial assets, direct investments abroad amounted to USD329.1 billion, portfolio investments USD260.4 billion, other investments USD755.1 billion, and reserve assets USD3270.6 billion, accounting for 7 percent, 6 percent, 16 percent, and 71 percent respectively. In terms of external financial liabilities, foreign direct investments totaled USD1583.8 billion, portfolio investments USD230.9 billion, and other investments USD815.4 billion, accounting for 60 percent, 9 percent, and 31 percent of external financial liabilities respectively. The International Investment Position (hereinafter referred to as the IIP) is a statistical statement reflecting the stocks of financial assets and liabilities of one country or region to other countries or regions in the world at one specific point; together with the Balance of Payments Statement (BOP Statement) it constitutes the complete international accounts system, indicating the country’s or region’s trade flows. FILE: China's International Investment Position(2011Q2) 2011-10-19/en/2011/1019/1017.html
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According to the statistical data released by the State Administration of Foreign Exchange (SAFE), in September 2011 the amount of foreign exchange settlements and sales by banks on behalf of clients amounted to USD142.6 billion and USD116.6 billion respectively. The surplus of foreign exchange settlements and sales by banks on behalf of clients amounted to USD26 billion. For the first nine months of 2011, the cumulative amount of foreign exchange settlements and sales by banks on behalf of clients amounted to USD1211.2 billion and USD830.5 billion respectively. The surplus of foreign exchange settlement and sales was USD380.7 billion. In September 2011, foreign-related receipts and payments by domestic banks on behalf of clients amounted to USD209 billion and USD197 billion respectively, and the surplus of foreign-related receipts and payments reached USD12 billion. For the first nine months 2011, the cumulative foreign-related receipts and payments of banks on behalf of clients amounted to USD1700.9 billion and USD1461.9 billion respectively; and the surplus of the cumulative foreign-related receipts and payments reached USD248 billion. 2011-10-31/en/2011/1031/1018.html
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According to statistical data released by the State Administration of Foreign Exchange (SAFE), in October 2011 the amount of foreign exchange settlement and sales by banks on behalf of clients amounted to USD115.2 billion and USD112.1 billion respectively. The surplus of foreign exchange settlement and sales by banks on behalf of clients amounted to USD3.2 billion. For the first ten months of 2011, the cumulative amount of foreign exchange settlement and sales by banks on behalf of clients amounted to USD1326.5 billion and USD942.6 billion respectively. The surplus of foreign exchange settlement and sales was USD383.9 billion. In October 2011, foreign-related receipts and payments of domestic banks on behalf of clients amounted to USD186.8 billion and USD175.9 billion respectively; and the surplus of foreign-related receipts and payments reached USD10.9 billion. In the first ten months 2011, the cumulative foreign-related receipts and payments of banks on behalf of clients amounted to USD1896.7 billion and USD1637.8 billion respectively; and the surplus of the cumulative foreign-related receipts and payments reached USD258.9 billion. 2012-01-18/en/2012/0118/1026.html
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According to statistical data released by the State Administration of Foreign Exchange (SAFE), in October 2011 the amount of foreign exchange settlement and sales by banks on behalf of clients amounted to USD115.2 billion and USD112.1 billion respectively. The surplus of foreign exchange settlement and sales by banks on behalf of clients amounted to USD3.2 billion. For the first ten months of 2011, the cumulative amount of foreign exchange settlement and sales by banks on behalf of clients amounted to USD1326.5 billion and USD942.6 billion respectively. The surplus of foreign exchange settlement and sales was USD383.9 billion. In October 2011, foreign-related receipts and payments of domestic banks on behalf of clients amounted to USD186.8 billion and USD175.9 billion respectively; and the surplus of foreign-related receipts and payments reached USD10.9 billion. In the first ten months 2011, the cumulative foreign-related receipts and payments of banks on behalf of clients amounted to USD1896.7 billion and USD1637.8 billion respectively; and the surplus of the cumulative foreign-related receipts and payments reached USD258.9 billion. 2012-01-04/en/2012/0104/1021.html
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11. We have noticed some recent media reports saying that China's foreign exchange reserves have exceeded a reasonable level.Has the USD3 trillion in foreign exchange reserves exceeded a rational scale or actual needs? Answer: By the end of June 2011, China's foreign exchange reserves reached USD3.197491 trillion. The increase in foreign exchange reserves is an objective result of the twin surplus in the balance of payments during this stage of economic development. We are not pursuing large-scale foreign exchange reserves, nor are we pursuing a long-term surplus in the balance of payments. There is no unified international or domestic standard for a reasonable scale of foreign exchange reserves to be held by a country. Various factors need to be taken into consideration, including the countrys macro-economic conditions, its degree of economic openness, the capability to utilize foreign capital and international financing, and the degree of maturity of its economic and financial systems. Since China is a large developing country, maintaining sufficient foreign exchange reserves is of great significance to ensure international liquidity, enhance capability to respond to risks, and safeguard the economic and financial security of the nation. During the 12th Five-Year Plan period, the main focus of Chinas scientific development in all economic and social fields is to accelerate the transformation of the mode of economic development. We shall take comprehensive measures, promote economic restructuring, and transform the mode of economic development, so as to fundamentally alleviate the pressures caused by the inflows of foreign exchange funds and to achieve a basic equilibrium in the balance of payments. 12. Some people believe that the current inflation in China is due primarily to the increase in foreign exchange reserves. What is the SAFE's view about this? Answer: The current rise in price levels in China is affected by a variety of factors, including the rise in prices of major international commodities, significant growth in expectations of global inflation, and greater pressures from imported inflation. In addition, the demands for domestic investment and the growing costs of energy resources, the labor force, and land have also pushed up the price levels. As a result of the increase in foreign exchange reserves, more RMB will be placed on the market, leading to growth in the monetary base. But we also have to note that on several occasions in recent years, the PBOC has conducted sterilization operations by raising the deposit reserve ratio and issuing central bank bills to soak up the liquidity caused by outstanding funds for foreign exchange reserves. The increase in foreign exchange reserves is not an immediate nor a major cause of inflation. 13. Some people believe that the system of mandatory exchange settlement and sales has led to a continuous increase in foreign exchange reserves. Is China still enforcing such a system? Answer: At present, the so-called system of mandatory exchange settlement and sales is already a historical concept. As for the foreign exchange proceeds from current account transactions through exports or other means, enterprises can keep them or sell them to banks depending on their own business needs. Established in 1994, the system of mandatory foreign exchange settlement and sales was a product of the period when there was a shortage of foreign exchange. At that time, except for those enterprises approved by the state that were allowed to keep foreign exchange in foreign exchange accounts, all enterprises were required to sell the remainder of their foreign exchange proceeds from current account transactions to designated foreign exchange banks. Thereafter, the SAFE continuously relaxed the constraints on opening foreign exchange accounts under the current account and raised the ceiling on such accounts. In 2002, these constraints on opening foreign exchange accounts were eliminated, and thereafter all enterprises were authorized to conduct foreign trade or to open foreign exchange accounts under the current account with foreign exchange proceeds upon the approval of the SAFE. In 2006, prior approval to open such accounts was no longer required. In 2007, enterprises could keep the foreign exchange proceeds from current account transactions according to their own business needs. In 2008, the revised version of the Regulations on Foreign Exchange Administration specifically provided that the foreign exchange proceeds from current account transactions could be either retained by the enterprises themselves or sold to the banks. Beginning on January 1, 2011, enterprise export proceeds can be deposited overseas and do not have to be repatriated. Therefore, our country has put an end to the system of mandatory foreign exchange settlement and sales. The increase in foreign exchange reserves has nothing to do with that system. 14. Why is specific information about the operations and management of foreign exchange reserves not allowed to be disclosed to the public? Will the SAFE further improve transparency in this regard? Answer: Information about Chinas foreign exchange reserves is disclosed in accordance with the General Data Dissemination System (GDDS) of the International Monetary Fund (IMF), which is consistent with practices in most countries. As a responsible professional investor, the SAFE has been disclosing information about the operation and management of its foreign exchange reserves in a timely manner to international financial organizations, market regulatory bodies, and so forth through the corresponding channels and in accord with domestic and overseas common practices. Because of the large-scale and strong market influence, investors and speculators in international financial markets have been keeping a close eye on Chinas foreign exchange reserves and trends in their investment and operations in the hopes of discovering and exploiting profit-making opportunities. Participants in international financial markets are all playing the same game of trying to obtain maximum information about their competitors and at the same time refraining from exposing as much as possible. To safeguard the security and interests of Chinas foreign exchange reserves, we shall adopt a serious and cautious attitude in terms of information disclosure and gradually improve transparency in an active and steady manner. Over the past few years, as society has been paying more attention to the operation and management of foreign exchange reserves, we have actively disclosed information to the public about basic conditions in the operation and management of our foreign exchange reserves and we have provided answers to hot issues of public concern in various ways, including press conferences, media briefings, forums of experts, and the SAFE portal. We will continue to do a good job in maintaining interaction and communications with the public and we welcome suggestions and opinions from all members of society.. 15. There are only several hundred members on the SAFE management team for foreign exchange reserves, so is there a problem that the scale of asset management per capita is too large? How do you control operational risks of the foreign exchange reserves? Answer: Talent is a basic guarantee for fulfilling various tasks. The SAFE has always attached great importance to building a team to be responsible for the operation and management of our foreign exchange reserves, and has recruited and cultivated talented investment personnel from China and abroad. Aimed at standardization, specialization and internationalization, the SAFE has established an operation and management team with a reasonable age structure and knowledge and a balanced mix of professional and management work. Meanwhile, the SAFE has constructed a complete global platform for reserve operations. During different stages of the economic cycle, the team has achieved the goal of ensuring security and liquidity, and maintaining and increasing the value of the foreign exchange reserve assets. Considering the different personnel requirements of various investment products, in the future the SAFE will make orderly adjustments to the structure and scale of foreign exchange reserve personnel to better adapt to the needs of large-scale operations. Under the current economic and financial situations both at home and abroad, in order to control risks in reserve operations, we shall, first, continue with diversified asset allocation and constantly optimize asset allocation based on market conditions in compliance with the principle of security, liquidity, and increasing value; second, we shall reasonably define the currency, assets, terms as well as the structure and proportion of product distribution, and strengthen risk management and internal control; third, we shall continue to improve the multilevel investment decision-making system, and ensure the objective, scientific, and professional level of the various investment decisions; and fourth, we shall constantly improve the platform for basic operations and expand and improve the channels for global operations. 16. Since developed countries are currently implementing quantitative easing monetary policies, there have been large net inflows of foreign exchange funds and a relatively rapid increase in foreign exchange reserves, and investments and operations have become increasingly difficult. What comprehensive countermeasures can be taken to deal with these problems? Answer: It is a systematic project to cope with the quantitative easing monetary policies of the developed countries and to promote Chinas basic equilibrium in the balance of payments, which requires the joint efforts of domestic macro-economic policies. In particular, in the current complex economic situations both at home and abroad, it is imperative to implement a policy package of expanding domestic demand, making structural adjustments, reducing the surplus, and promoting a balance. Expansion of domestic demand means that we shall especially expand consumption demand and fully exploit its huge potential. Making structural adjustments means that we shall promote the transition of the economic growth pattern to make it driven by consumption, investments, and exports. Reducing the surplus means that we shall attach equal importance to imports and exports, and give full play to the critical role of imports in the macro-economic equilibrium and structural adjustments. Promoting a balance means that we shall, within the framework of balanced management, fully utilize economic levers and market-based means to strengthen the management of capital inflows, open up channels for capital outflows, and promote the convertibility of the capital account in a steady and orderly manner. Only in this way will we be able to effectively cope with the quantitative easing monetary policies of the developed countries, comprehensively tackle the problems of a disequilibrium in the balance of payments and of a rapid increase in foreign exchange reserves, and implement the requirement of maintaining a basic equilibrium in the balance of paymentsas stipulated in implementation of the Scientific Outlook on Development of the 12th Five-Year Plan. 2011-07-28/en/2011/0728/1008.html
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6. Some people hold the opinion that China's foreign exchange reserves are hard-won money-earned by thousands of domestic enterprises and Chinese individuals in exchange for actual goods, energy, and resources, and with implicit environmental costs. What is your comment about this? Answer: China's foreign exchange reserves are formed when the Peoples Bank of China puts in our base currency and purchases foreign currencies on the foreign exchange market. The home-currency capital used in these purchases directly adds to the liabilities of the Central Bank, whereas Chinas foreign exchange reserves, equal in amount to the liabilities, show up on the asset side of the Central Banks balance sheet. When buying foreign exchange, the Peoples Bank of China pays a corresponding amount of RMB to the original holder of the foreign exchange. In other words, in the formation of the foreign exchange reserves, businesses and individuals are not contributing their foreign exchange to the State for free, but they are selling it to the State in return for an equivalent amount of RMB. These transactions are voluntary in nature and equivalent in value. The economic interests of businesses and individuals have already materialized when they trade their foreign exchange for Renminbi. 7. China has a huge stockpile of foreign exchange reserves that is regarded by the international community as a sovereign wealth fund, and relevant investment operations are often restricted by various factors, such as market capacity and politics. Is it possible for parts of the foreign exchange reserves to be entrusted to domestic professional financial institutions or international investment institutions and to be separately managed? Answer: Foreign exchange reserves, like sovereign wealth funds, professional asset management companies, and other types of institutional investors, are restricted by the international situation, market conditions, and regulatory rules. But unlike other institutional investors, foreign exchange reserves are very different in terms of fund sources, operational objectives, risk controls, and so forth. To ensure the safety of foreign exchange reserve assets, and to bring into full play the comparative advantages of massive operations in a mature investment market, China adheres to independent management of its foreign exchange reserves. Meanwhile, various effective methods have been explored to expand investment channels, including entrusted operations. Since 1996, the investment of a proportion of the foreign exchange reserves has been selectively entrusted to leading asset management institutions at home and abroad, all of which have a resounding reputation, a large amount of assets under their management, and an exceptionally successful performance record within the industry. Great importance has been attached to the risk management by these external managers, and their operations have been closely monitored as part of the overall risk management framework so as to ensure the safety of our foreign exchange assets. 8. Foreign exchange reserves should be from the people and for the people.If it is inappropriate to distribute foreign exchange reserves directly to the people, then is it possible to strip a part of the foreign exchange reserves and build a Sovereign Pension Fund in order to enhance Chinas social security system? Answer: Both suggestionseither directly distributing the foreign exchange reserves among the public, or using the reserves directly for social welfare programs such as pension insurance, medical care, and educationinvolve the same question: can the foreign exchange reserves be distributed and used without compensation? Unlike fiscal surpluses, foreign exchange reserves are created when the Central Bank purchases foreign currencies on the foreign exchange market; they represent foreign-exchange assets that correspond to the home-currency liabilities on the Central Banks balance sheet. To spend the foreign exchange reserves without compensation is to print money at will, and unchecked expansion of the issuance of money by the Central Bank will lead to dire consequences, such as inflation. Under the guidance of the management principle of compliance with the laws and regulations, utilization with compensation, increased efficiency, and effective regulation,efforts have been, and will continue to be made, to explore innovative channels for the management of foreign exchange reserves, so as to contribute to Chinas economic construction and to improving the peoples livelihood. 9. Currently, the foreign exchange position of domestic commercial banks is generally tight, thereby placing certain restrictions on their ability to support foreign trade and on the going globalpolicy of enterprises. Can we lend some of Chinas foreign exchange reserves to domestic commercial banks? Answer: China has sufficient foreign exchange reserves and convenient channels for foreign exchange purchases, which can fully satisfy the legitimate needs of commercial banks and enterprises to purchase foreign exchange. If banks and enterprises need foreign exchange for foreign trade and going global,they can purchase it with RMB funds at any time and without any policy barriers. The practice of simply lending foreign exchange reserves to domestic banks, however, will further reduce foreign exchange purchases and correspondingly exert more pressures on the foreign exchange purchases of the Peoples Bank of China (PBOC), which will not be advantageous to macro control. In recent years, taking into consideration the overall strategic situation of national development and based on the principle of compliance with the laws and regulations, utilization with compensation, increased efficiency, and effective regulation, the PBOC and SAFE have developed various channels to apply the foreign exchange reserves, effectively serving the needs to purchase foreign exchange by banks and enterprises and strongly supporting foreign trade and implementation of the going global strategy. 10. In recent years, on several occasions China has put maintained that it encourages foreign exchange to beheld by the people,but why is it difficult to realize this? Answer: In recent years, Chinas balance of payments has maintained a twin surplus,and especially after the global financial crisis, international liquidity has proliferated and large-scale foreign exchange net inflows have resulted in the continuous accumulation of foreign exchange reserves. At present, China actively supports residents to hold and use foreign exchange, and the nation has realized full convertibility under the current account and is able to fully satisfy the foreign exchange purchase needs of residents for trade in goods and trade in services as well as other purposes under the current account. Under the capital account, except for partial control over some high-risk balance of payments transactions, there are no policy barriers to either foreign direct investments by enterprises or investment in overseas capital markets by enterprises and individuals through qualified domestic institutional investors (QDII). However, due to an anticipated RMB appreciation as well as the interest margin and exchange rate difference between domestic and overseas markets, enterprises and individuals now have a strong desire to settle foreign exchange and they are generally unwilling to hold or retain foreign exchange. In other words, the barrier to foreign exchange to be held by the peoplelies not in policy, but in the willingness of the holders of the foreign exchange. 2011-07-25/en/2011/0725/1006.html
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Editor's Note: The FAQs on Foreign Exchange Administration Policies released by the State Administration of Foreign Exchange (SAFE) in July 2010 helped the general public learn about foreign exchange administration and received positive feedback. Recently, the media, experts, scholars, and the public have attached great importance to issues related to the foreign exchange reserves and offered many valuable opinions and suggestions, thereby giving us an important impetus to improve our work. In order to promote communication and interaction with people from all walks of life, we have compiled the FAQs on Foreign Exchange Reserves with respect to the recent hot topics. These FAQs will be published in three installments for your discussion and reference. 1. Recently, the SAFE issued a public statement that an appreciation of the RMB will not lead to any loss of foreign exchange reservesand explained this view from the perspective of book-value gains. Nevertheless, some people still believe that an RMB appreciation will gradually dissipate our wealthforeign exchange reservesjust like a cooked duck flying away.So, will an appreciation of the RMB really lead to actual losses of foreign exchange reserves and even social welfare? Answer: An appreciation of the RMB will not directly causes losses of Chinas foreign exchange reserves. Foreign exchange reserves are essentially assets in foreign exchange, which use the USD as the recording currency. Variations in the RMB/USD exchange rate will result in a change in the book value of the RMB that is converted from the foreign exchange reserves, which is not the actually realized gains or losses. The variations only mean some differences in the book value when using different reporting currencies, be it RMB or USD, and thus will not have a direct impact on the effective purchasing power of the foreign exchange reserves. Changes in foreign exchange will only occur when the foreign exchange reserves are repatriated from overseas countries (regions) and converted into RMB. At present, China has no need to repatriate its foreign exchange reserves on a large scale. We can give a counter example: if an RMB appreciation should lead to losses in Chinas foreign exchange reserves, then a depreciation of the RMB would bring about gains in our foreign exchange reserves. According to this logic, we could increase the returns on our foreign exchange reserves and even our social wealth by continually depreciating the RMB, which, in fact, is impossible. We should adopt a comprehensive and objective view of the impact of an increase in foreign exchange reserves from the overall situation in Chinas development and reform. By the end of June 2011, Chinas foreign exchange reserves reached USD3.197491 trillion. Such increase in foreign exchange reserves is of great significance to improve Chinas external payment ability, promote its reform and opening-up, and raise its international status. However, the excessively rapid increase and large scale of the foreign exchange reserves pose certain challenges to their operation and management. Therefore, it is imperative that we accelerate the transformation of the economic development mode, follow the concept of expanding domestic demand, adjusting the structure, reducing surpluses, and promoting a balance,expedite the reform of the RMB exchange-rate formation mechanism, give full play to the fundamental role of the market in the allocation of resources, and promote the balance of payments so as to achieve a basic equilibrium. 2. According to a report by the U.S. Department of the Treasury, China is the largest holder of U.S. Treasury bonds. Lately, credit rating agencies, including Standard & Poors, Moodys, and Fitch, have repeatedly issued warnings about the U.S. debt problem. In the case of a USD depreciation and a future rise in inflation in the U.S., is it a growing risk to hold such a large sum of U.S. Treasury bonds? Will this sum be reduced in the future? Answer: U.S. Treasury bonds are both a reflection of the credibility of the U.S. government and a critical variety of investment for U.S. and international institutional investors. To buy U.S. Treasury bonds with foreign exchange reserves is market investment behavior, and it will be dynamically adjusted according to market conditions. Any increase or decrease in the holding of U.S. Treasury bonds is a normal investment operation. We have noted the latest views expressed by Standard & Poors and other rating companies regarding the credit rating of the U.S. sovereign debt, and we expect that the U.S. government will take responsible policy measures to boost the confidence of the international financial market and respect and guarantee the interests of its investors. 3. Recently, the prices of gold, petroleum, and other major international commodities have risen dramatically. Why do we not invest our foreign exchange reserves more in these commodities and in energy resources? Answer: Gold, silver, and other precious metals, as well as major international commodities like petroleum and iron ore, often experience great fluctuations in price, their market capacity is relatively limited, and their transaction, collection, and storage costs are high. Investment in these commodities is already included in the investment portfolio of our foreign exchange reserves; furthermore, there are special domestic institutions engaged in the collection and storage of major commodities and other related work, which serve as a supplement to the investment of our foreign exchange reserves so as to jointly safeguard Chinas overall interests. In addition, gold, petroleum, and so forth are consumed in huge quantities by residents and enterprises in China, so any large-scale investment of our foreign exchange reserves in such items will possibly raise their market prices, and in turn will hinder Chinas household consumption and economic development. 4. Some people believe that the scale of Chinas foreign exchange reserves is so large that we should not only pay attention to their security but also make efforts to increase the gains from our foreign exchange. What measures have been taken in this regard? Answer: Financial investment is a major part of the investment of our foreign exchange reserves. Because modern financial markets are highly efficient, more returns are usually accompanied by greater risks. During the current global financial crisis, a great number of financial institutions went bankrupt or were acquired, some of which in the past had been leaders in the industry with splendid achievements. However, due to their failure to maintain a balance between risks and returns, they could hardly carry on under the deteriorating market conditions, thereby providing us with a good lesson. The management of our foreign exchange reserves must emphasize scientific operations and sustainable development. The nature of Chinas foreign exchange reserves requires that their operation and management adhere to the principles of security, liquidity, and increases in value, among which security is the primary principle. In addition, the foreign exchange reserves should maintain sufficient liquidity to satisfy the general demand for external payments, and also to play an effective role in safeguarding the stability and security of the national economy and finance. Under the precondition of guaranteeing overall security and liquidity, the operation of our foreign exchange reserves shall strive for higher investment returns in an effort to help attain the goal of maintaining and increasing their value. 5. In the face of holding such a large scale of foreign exchange reserves, what can we do to better promote a diversification of our foreign exchange assets? Answer: Diversification is one of the main operating principles of our foreign exchange reserves. In order to better promote our diversification strategy, we should avoid several misunderstandings. First, a superficial diversification of investment products -- different investment products may possess very similar risk factors, so it will not be spreading risks if we allocate funds to these sorts of investment products. Second, a superficial diversification of investment industries and regions -- without considering the interconnections among industries and the degree of integration among regions, investments will not necessarily achieve the expected goal of diversification. Third, deciding the timing to implement diversification according to the short-term performance of the market and public opinion -- effective diversification is a way to allocate assets strategically, which requires prospective planning and implementation. Diversification based on the short-term performance of the market and public opinion is often irrational and unprofessional, and can easily degenerate into opportunistic practices. 2011-07-20/en/2011/0720/1005.html