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| China’s Foreign Exchange | | Print | |
| Sep / Oct 2008 | |||
 More and more Chinese are beginning to question how Beijing uses its foreign exchange holdings writes Willy Lam.Yes, it is unlikely that the just-ended Beijing Summer Games will have the same effect on China's democratization that the 1988 Seoul Olympics had on South Korea's political change. Yet there is little question that the Beijing Olympics has speeded up China's globalisation, and along with it, a readiness by Chinese to speak up on matters that affect their livelihood. And given that many political topics are still taboo, it is not surprising that more Chinese are expressing their views on economic and financial matters. A hot topic is China's incredibly aggrandising foreign-exchange holdings, which have breached the $1.8 trillion mark. While Beijing never discloses how it disposes of its forex hoards, it is well-known that much of them are held in American dollars - including some $506 billion of US Treasury bonds. This is despite the fact that the People's Bank of China, China's central bank, has indicated since 2005 that more of the country's reserves will be kept in Euros and other "stronger" currencies. Given the delicate nature of China-US relations, most Chinese intellectuals, including increasingly feisty commentators in the country's financial media, have not queried Beijing's decision to purchase American government bonds. After all, there is a subtle quid pro quo between Beijing and Washington: in return for China holding on to the treasury bills - thereby ensuring that the US government does not need to pay higher interest on its gargantuan borrowings - the latter would not press China too hard on issues like the latter's outsized trade surplus. As Fannie Mae and Freddie Mac got into trouble last month in the wake of the worsening subprime crisis, however, it came to light that the Chinese state-controlled banks and other government agencies had bought $376 billion worth of bonds issued by the two mortgage giants. While the White House subsequently indicated that the Federal Government would bail out Fannie and Freddie, Chinese economists and commentators have begun questioning how their government is investing those hard-earned forex reserves overseas. Ye Tan, a respected finance columnist for the mass-circulation Southern Metropolis Newspaper pointed out in late July that "the people are very bitter and frustrated about how the country's forex holdings have shrunken" due to supposedly ill-placed investments. Ye took the central government to task for putting money in "the high-risk bonds" of the two US mortgage corps. He also faulted Beijing for keeping too much of its reserves in US dollars, adding that depreciation of the greenback had in the first half of the year resulted in the Chinese government losing the equivalent of 100 billion yuan. The commentator urged the administration, whose well-known mantras are "putting people first" and "seeking profits for the sake of the people" to consider ways of using its forex hoards to "enrich the people." Interestingly enough, when Beijing announced earlier this year that central coffers had collected more than 5 trillion yuan of taxation last year - compared to a mere 2 trillion yuan in 2002 - there were also suggestions by the nation's increasingly assertive bloggers that the central government should "return its wealth to the masses." At the same time, even official newspapers are voicing misgivings over Beijing's decision earlier this year to let the renminbi appreciate faster. Apart from appeasing China's critics in the West, the State Council believed that a higher-valued Chinese currency would help fight inflation - at least that caused by imports. Yet in an article in Shanghai's official Jiefang Daily, Shanghai University of Finance and Economics professor Tan Ruyong argued that there was no factual basis behind the theory that faster renminbi appreciation would help beat inflation. Tan pointed out that while the renminbi increased in value by 6.46 percent in 2007 relative to the greenback, the consumer price index shot up by 4.8 percent last year. And inflation has worsened in 2008 in tandem with an even faster pace of currency appreciation this year. Indeed, even as the leadership under President Hu Jintao is basking in the glory of the largest-ever Olympics, central party and state authorities are facing growing pressure from different industrial sectors - as well as regional administrations - to slow down the pace of renminbi appreciation. As signs of an economic downturn in the US become clearer, exports to China's major markets are expected to be even weaker in the second half of the year. And the newly critical voices in the media reflect the fears among provincial and municipal cadres that leaner fortunes for the World Factory could translate into job losses - and very likely, horrendous social unrest. ■
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