China to Use Forex Reserves to Finance Overseas Investment Deals
China’s foreign-exchange regulator said a new unit will use the nation’s $3.3 trillion in reserves to support Chinese companies expanding abroad, signaling fresh outlets for the world’s largest currency stockpile.
The State Administration of Foreign Exchange said in a statement on its website today that its Co-Financing office has been seeking “innovative use” of the reserves and “supporting financial institutions in serving China’s economic growth and going-out strategy.”
The increased support may further boost Chinese non- financial investment overseas that rose 25 percent in the first 11 months of 2012 to $62.5 billion amid slower growth at home. The Chinese government has been encouraging companies to buy assets overseas through a “going out” strategy to secure energy and commodity resources, buy technology and build internationally competitive businesses.
“A larger portion of China’s reserves is expected to be used to finance overseas investment deals,” said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong. “Given the large size of China’s reserves, a small percentage change will mean a big amount.”
Zhang said only a small part of China’s reserves are expected to be used in the new office.
The office will respect “market choice and willingness” and promote “fair play,” SAFE said. The operations have “promoted China’s economic and social development, expanded investment scope and fields of foreign exchange reserves and promoted a diversified management approach,” said the Beijing- based agency, which is part of the central bank.
SAFE’s 2011 annual report, published June 2012, listed the office in an organization chart, without giving details on its role.
Separately, SAFE’s head said the nation must seek to avoid failed overseas investments and needs more justification to use the reserves than assertions that deals boost the nation’s resources or security.
Domestic companies have asked the government for inexpensive foreign currency, “claiming their deals are buying resources for the country or improving national strategic security,” Yi Gang wrote in an article in the Jan. 14 edition of Chinese magazine Century Weekly, published by Caixin Media. “Cheap funding” only encourages blind overseas purchases and leads to investment failures, Yi said.
SAFE had already started “co-financing” operations before the unit was created, mainly with China Development Bank, Caixin reported. About two-thirds of the bank’s $250 billion in foreign-exchange loans are sourced from SAFE, Caixin said.
--Zhou Xin. Editors: Scott Lanman, John Liu
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