Special Report:Global Financial Crisis
BEIJING, Nov. 28 -- As the world strives to survive the financial tsunami,
how China uses its large amount of foreign reserves has been a focus of
attention.
By September, China had owned 585 billion U.S. dollars in the U.S.
government bonds, becoming the largest creditor of the world's largest economy,
according to the latest statistics from the Ministry of Finance. It bought new
US national debts every month during this year's first three quarters.
In September alone, China bought an additional 43.6 billion dollars of U.S.
treasury bonds, twice as much as that it held in the previous month.
As the international financial turmoil still evolves, the US government
bonds seem to be a low-risk option for the world's largest developing country to
invest its foreign reserves.
Since the outbreak of the US subprime crisis, the world's turbulent
financial market has put China's more than 1.9-trillion-dollar foreign reserves
at a high financial risk.
Some domestic scholars and economists have become increasingly vocal
arguing that the country should not hold such a large amount of US government
bonds to avoid any possibility that our people may pay for a subprime crisis in
the U.S.
There surely are some reasons for such worries. But the question is: can
China find a safer investment destination for its foreign reserves in the
current international financial market with a lower risk but a higher return?
The answer is no.
On the contrary, it turned out that with a large portion of its foreign
reserve flowing to low-risk U.S. government bonds, China has successfully
minimized the impacts of the ongoing financial crisis upon its own financial
structure and the economy as a whole.
It is true that the unstable international financial situations do expose
China's investment in the U.S., either its dollar-holding foreign reserves or
American equity products bought by its Chinese financial bodies, to a certain
risk of wealth shrinkage.
Some propose the country shift its enormous foreign reserve investment to
Europe to evade possible financial risks caused by its excessive concentration
in the U.S. market. Then raises another problem: in which areas can the country
invest in the European markets and whether the European continent can remain
immune to the catastrophic financial sandstorm that first broke out in the
world's most powerful economy?
As a matter of fact, another ideal destination for China to use its foreign
reserves is back in Hong Kong's H-share market. After experiencing the latest
round of price decline, a number of stocks in the H-share market have already
had no space for a further tumble. Take China Southern Airlines, China Eastern
Airlines, and China Aluminum. All the shares of these enterprises are now at a
reasonable price level after suffering a steep fall in recent months.
That has not only dealt a severe blow to the confidence of overseas
investors in the H-share market, but has also deprived these Hong Kong-listed
enterprises of a further financing function.
If the central government uses its strong capital reservoir to buy these
enterprises' stocks, the dented investor confidence in them would be
substantively elevated, which would help regain their lost financing functions.
As leading enterprises in relevant domestic industries, these companies have
long served as the backbone and pillar of our national economy.
Not only listed in Hong Kong, these firms are also listed in Shanghai's
A-share bourse and act as the market's weighted shares. Shifting part of the
country's foreign reserves to H-shares is also expected to restore investor
confidence in the whole domestic stock market if it performs well in more mature
Hong Kong capital market. That will influence to some degree the trend of stocks
in the A-share market.
The flow of the country's foreign reserve to H shares will also help
investors regain confidence in Hong Kong's stock market.
Over the past year, stock prices in the region have experienced drastic
fluctuations, with its Hang Seng index falling to a little more than 10,000
points from last year's highest 31,000, or down by more than 60 percent.
Considering domestic H-shares play an influential role in Hong Kong's stock
market, the flow of the country's foreign reserves to H-shares will surely help
retrieve investor confidence in Hang Seng's H-shares.
It is also because we have a better knowledge about the market compared
with other risky or uncertain foreign stock markets.
It also means injecting new vitality into the future of the country's
economy. Also, given its large scale, the flow of part of the country's huge
foreign reserve to H-shares will not cause excessive speculations under the
current well-developed financial monitoring system in Hong Kong.
(Source: China Daily/By Yi Xianrong)
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