MARKET WATCH

MARKET WATCH

OPINION

Addressing Forex Conundrum

It is reported that Chinese policymakers are mulling reforms to allow individuals in Wenzhou, a hotbed of private economy in east China’s Zhejiang Province, to directly invest in overseas assets.

The move is expected to loosen control over private investors, and widen their channel to invest abroad. More importantly, it is intended to diversify foreign exchange(forex) holdings of the country and facilitate a signi fi cant private wealth boom.

In the past 30 years, China has accumulated a pile of forex reserves thanks to torrid economic growth. Its forex reserves currently stand at around $3.2 trillion, accounting for more than 30 percent of the world’s total, and three times that of Japan.As part of China’s national wealth, the forex reserves have deep implications for the country’s economic globalization.

But unlike most other nations, the of fi cial forex reserves accounted for a majority of China’s overall forex wealth. For instance,the of fi cial forex reserve of the United States is only 20 percent that of China, but the forex holdings of private American investors are as much as $9 trillion. The of fi cial forex reserve of Japan is only more than $1 trillion, but its private holdings are at least $3 trillion.

China’s International Investment Position showed that foreign direct investment (FDI) accounted for nearly 60 percent of the country’s international liabilities,compared with only 55 percent for the United States. Foreign investors have made handsome profits from their investments in China. Moreover, the massive FDI infl ows drove up China’s forex reserves, but the country has parked most of the forex reserves in low-yielding U.S. Treasury securities.

That means China has yet to make full use of the forex reserves and produce tangible benefits to the economy and domestic residents. Between 1990 and 2008, China accumulated $60.553 billion of de fi cits in net investment return under the balance of payments.

In a bid to improve its asset quality and structure, China has a lot to learn from Japan. In 2005, Japan shifted its focus of national strategy from trade to investments, and increased efforts to raise returns on overseas investments. It also vowed to double the payment surplus-to-GDP ratio by 2030. In the last five years, Japan has harvested an annual average of $50 billion in interest on overseas securities, and its enterprises also generated enormous pro fi ts from their overseas portfolios.

For China, it is necessary to strike a balance between official forex reserves and private forex holdings, and diversify investments of forex reserves in a range of fl uid and safe assets. Efforts are needed to kick-start a new round of reforms to optimize the structure of forex reserves.

First, China needs to build a multi-level forex trading market, and provide hedging tools for investors to reduce risks.

Second, the government should provide policy incentives to encourage private investors to go global. Meanwhile, it is necessary to accelerate internationalization of the renminbi, and facilitate overseas investments by individuals.

In addition, the country ought to establish funds to support entrepreneurs in overseas mergers and acquisitions, technology innovation and energy investments outside China.

THE MARKETS

Exploring China

Around 82 percent of U.S. firms in China will continue to raise their investment in the world’s second-largest economy this year, but the pace of the increase is expected to be moderating,according to a survey made by the American Chamber of Commerce in China (AmCham China) over its 390 member companies.

The percentage of those gearing to boost investment 21 percent or more declined,likely a response to slower economic growth and rising costs in China.

Meanwhile, 76 percent of the respondents forecast their 2012 revenues to surpass those of 2011, and 68 percent expect their China operating margins to be more than their worldwide operating margins.

But many hurdles remain. The survey showed foreign businesses continue to struggle with challenges related to the local talent pool and intellectual property rights.

“Many of our members also noted concerns about substantial increases in costs. The reasons include rapid increases in wages as well as the cost of bene fi ts under the new social insurance law,” said Ted Dean, Chairman of AmCham China.

Logistics Slowdown

China’s logistics industry will continue reeling from waning demand and rising oil prices,said the China Federation of Logistics and Purchasing (CFLP).

In the fi rst two months of 2012, the country’s social logistics value rose 10.6 percent year on year to 23.5 trillion yuan ($3.73 trillion), but the growth rate was down 3.9 percentage points from a year ago.

A domestic economic slowdown amid the global downturn and tepid logistics activities after the Spring Festival holiday (January 23-29) were the main reasons for the drop, the CFLP said.

Meanwhile, logistics costs in the fi rst two months increased 12.3 percent to 1.3 trillion yuan ($206.3 billion), of which transportation costs went up 11.8 percent to 700 billion yuan($111.1 billion).