Gold Forecaster
- Global Watch
China diversifies to buy
its future, ignoring western morality
Julian D.W.
Phillips
Gold Forecaster snippet
Feb 17, 2007
- Below is a snippet from the
latest weekly issue from www.GoldForecaster.com
A year ago the Chinese began
making plans to push a good percentage of their reserves overseas.
They are now at last taking action to implement a new policy
of diversifying the country's over US$1 trillion foreign exchange
reserves.
Yuan Bonds
The Ministry of Finance
(MOF) is planning to issue Yuan-denominated bonds to raise funds
that will be used to "buy out" as much as $200 billion
from the country's foreign reserve pool. To take funds out of
the foreign exchange reserves the government must pay the equivalent
amount in Yuan to balance the books. At the current exchange
rate, the total amount of Yuan bonds to be issued by the MOF
will be more than 1.5 trillion Yuan. The ministry will sell the
bonds to commercial banks. The scale of the Ministry of Finance's
planned bond issuance is so huge that it will have to be done
phase-by-phase. In so doing, pressure on market liquidity can
be alleviated. Although the market is awash in liquidity, the
issue needs to be in line with monetary policy. Nowadays, liquidity
inside the banking system is more than sufficient. If the government
bonds are issued phase by phase, the due bank notes issued by
the P.BoC and the new base money from the purchase of the foreign
exchange will allow the market to absorb the pressure. If the
1.5 trillion Yuan is drawn from the banking system in three years,
the market could bear the impact on liquidity, it is believed.
Invested back overseas
The $200 billion "bought
out" from the foreign exchange reserves will then be injected
into a new company to be set up this year to handle overseas
investment with foreign reserves. The State Council, China's
cabinet, will control the new company, tentatively named National
Foreign Exchange Investment Co. It will spend funds from the
foreign reserves on mergers and acquisitions of overseas businesses,
including foreign financial institutions. It will also target
overseas energy assets and will likely acquire equities in the
domestic markets, or even lend money to help finance domestic
research and development projects. Very neat!
Little effect inside
China
Why? - Because the
way this is being handled takes excess liquidity out of the Chinese
monetary system and keeps the reserves offshore. This way the
upward pressure on the Yuan can be eased as well. Simply put
the foreign exchange reserves are being separated from the internal
economy despite their being export revenues. The control of the
money supply through the draining of liquidity from the internal
system after exporters have received Yuan payments is the only
way to do it. But this permits the effective overseas investment
of the surpluses. Some suggest that the government adopt a Japanese
practice: the Ministry of Finance issues home-currency denominated
bonds to buy foreign exchange flowing into the country. The purpose
of the policy is to separate the burgeoning money supply from
the increasing foreign exchange reserves.
This contrasts with the U.S.
system where such issues are used to accommodate foreign investments
inside the U.S.A. [as well as the local bond and bill system].
$ worries persist
The government is worried
about the appreciating Yuan and needs to protect its value. Selling
the $' is just not an option at this stage, the fall in the $
would be disastrous on the balance of the reserves. If the US
dollars depreciate against the Yuan by 5% this year, which is
almost certain, the reserves will "shrink" by $50 billion
against the Yuan, equivalent to the amount of capital the Central
Huijin Investment Co has injected into Industrial and Commercial
Bank of China (ICBC), Bank of China (BOC) and China Construction
Bank (CCB). Now the government has handed the responsibility
out and to a body that will spend these $' overseas for productive
assets or future supplies of strategic materials. This is an
effective 'switch' from the $ to assets [not other paper].
Some believe that the government
is considering hedging the risk on their $'. With that many dollars
that will be interesting.
Enough?
But you would accurately
say that 200 billion is now lower than one year's accumulation
of foreign reserves, leaving a trillion to invest still after
this year's surplus. No doubt they will be able to expand their
foreign investments in this way, if this proves successful. But
still far more has to be done to handle present and future reserve
growth.
S.A.F.E. & the
People's Bank of China
The new policy is bound
to change China's current foreign exchange management regime,
which is dominated by the State Administration of Foreign Exchange
(SAFE). According to the People's Bank of China, (P.BoC), the
central bank, the SAFE is responsible for the stewardship of
the largest foreign exchange reserves in the world. It is estimated
that over 60% of the reserves are invested in U.S. Treasury bonds,
with an annual return rate of about 3.5%. The foreign exchange
system has to be capable of hosting one of the globe's future
key reserve currencies, the Yuan and developments will head that
way. Meanwhile, S.A.F.E. will also set up an overseas company
to prudently invest in low-risk, long-term Treasury bonds and
housing mortgage bonds denominated by the US $ and the €.
Amoral Investment
policy
Perhaps the largest
difference between the West and the East in terms of dealing
with emerging [minor] nations and their resources is in the concept
of dominance. Governmental morality comes with investments from
the West pushing these nations to adopt democracy and certain
policies promoted by the West [however well meaning].
Investment from the East [China]
comes in the hope of securing long-term strategic supplies without
commenting on local politics or practices. China also likes to
get its feet under the table of these nations through 'soft'
[we imagine little expectation of repayment] loans, infrastructural
development and other favors making them the preferred buyer
of these strategic reserves.
China likes to invest in areas
practically beyond the reach of the West and as close to home
as they can. It is a policy that is not only meeting with success,
but causing many of these nations to strut loudly against the
U.S.A.. To date they have been successful, but we have to recognize
this is just a start.
With the above investment corporation
now set up, a trillion to invest with $250 billion more per annum
at least, expect to see them popping up everywhere. With no imposition
of democracy on some despotic nations and few strings attached
to China they would call the Chinese extremely pliant partners.
Yes, it will foster the worst in minor world leaders, but it
will get them the resources they want and spread their influence
globally. They appear unstoppable?
Zambia
Chinese President Hu
Jintao announced an $800 million investment package in Zambia
on the second day of a two-day visit to the southern African
country where a Chinese rush on resources is the source of growing
unease.
The two also agreed on the
creation of a special economic zone, in the town of Chambishi
in the Copper Belt north of Lusaka, where Chinese firms would
operate free of import duties and VAT. The Zambian and Chinese
leaders signed a total of eight cooperation agreements on aid
and investment. These included agreements on Chinese technical
training for Zambian agriculture experts, an interest-free loan
toward road-making equipment, the building of two rural schools
and a football stadium, special treatment for Zambian exports
to China, and work permits for Chinese workers. China also agreed
to write off $3 million in Zambian debt owing to Beijing.
Chambishi is home to Chinese-owned
Chambishi Mines, one of the world's largest copper producers.
China last year announced the construction of a $200 million
smelter at the mine.
Hu said he was committed to
the development of African economies, "China is looking
for the strategic and mutual friendship of a win-win situation
in Africa," he said. Mwanawasa described Hu's visit as a
milestone that would strengthen economic cooperation between
the two countries and vowed the planned Chinese economic zone
would not jeopardize Zambian business interests.
The Chinese-assisted construction
of a stadium at Ndola is designed to help Zambia attract business
from teams practicing for the 2010 World Cup in South Africa.
Sudan
The United States said
on Monday that a visit by China's president to Sudan, when he
offered a loan to build a presidential palace, sent "mixed
signals" about Beijing's intent to press Khartoum over Darfur.
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for the entire report.
Feb 9, 2007
-Julian
D.W. Phillips
email: gold-authenticmoney@iafrica.com
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