China forex chief signals investment shift
China will forge ahead with efforts to diversify its $3.3 trillion foreign exchange stockpile into higher yielding assets, Yi Gang, director of China’s State Administration of Foreign Exchange (SAFE), says.
By Taimur Ahmad
China will forge ahead with efforts to diversify its
$3.3 trillion foreign exchange stockpile into higher yielding
assets, including emerging market bonds and currencies, amid
expectations of continued poor returns from developed markets,
its top forex official has said.
In an exclusive interview with LatinFinance,
Yi Gang, director of China’s State Administration
of Foreign Exchange (SAFE), said that low US yields following
successive rounds of quantitative easing (QE) had thrown up "a
lot of challenges".
Yi, who is also a deputy governor of
China’s central bank, said that emerging market
assets, including those of Latin America, "are all in our
investment sights", along with developed markets.
"We really have to have a diversified and balanced
portfolio," Yi told LatinFinance in an interview
during the annual meeting of the Inter-American Development
Bank in Panama.
"We diversify in terms of currency, in terms of asset
class, in terms of developed market versus emerging markets,
which makes the overall reserve investment diversified and
balanced," he said.
Yi said that an aggressive policy of quantitative
easing by the US "has driven down the interest rate so that
[US] bond yields have decreased for years. There are a lot of
challenges if you invest in this market."
US Treasuries, of which China remains the largest
foreign buyer, are nevertheless a "major market if you pursue
safety and liquidity," he said.
The deputy governor said he did not think it likely
that the US Federal Reserve would wind down its latest round of
QE early, despite mounting market expectations to the
"I think [Fed Governor Ben] Bernanke’s
message is very clear [that such an exit would take time]," he
He added, however, that emerging markets were not
"large or deep enough as an asset class" for any substantial
Chinese investment. "They have tremendous potential, though
right now it’s not very large," he
China’s forex supply was "already large
enough", Yi said. "The marginal benefit of continuing to
increase reserves is diminishing."
But he added that the accumulation of reserves would
inevitably slow as the economy rebalances towards domestic
"We are pursuing a balanced balance-of-payments, and
in that case we won’t have a rapid accumulation of
reserves," he said, pointing out that reserves growth had
already slowed significantly "in past five or six
Yi said Chinese authorities were poised to make
"significant" moves towards currency flexibility. "You will see
significant development in the convertibility of RMB within the
next three years," he said, insisting that China’s
currency was already "very close to equilibrium".
"All the evidence suggests that right now RMB exchange
rate, which is around 6.25 to the dollar, is very close to its
equilibrium level," he said.
China was "determined to continue market-oriented
reform" of its exchange rate, he added.