Forex market faces new challenges
Repositioning targeted, with safety the priority
Effectively managing foreign reserve assets has long been a key challenge for central banks, and China is no exception.
But now, the country, which holds the world's largest foreign exchange reserves, is looking for better ways to keep the vast amount of assets safe and maximize investment returns.
The world's second-largest economy's foreign exchange, or forex, reserves stood at about $3.1 trillion by the end of last month, up by $31 billion, or 1 percent, from the beginning of this year, according to the People's Bank of China, the central bank. Last year, the reserves fell by $67 billion from a year earlier, after rising by $129 billion in 2017.
The reserves stabilized at just over $3.07 trillion, about 24 percent of GDP, by the end of last year, and comprised nearly 27 percent of such assets globally, according to the International Monetary Fund.
Foreign exchange reserves refer to any overseas financial assets held by a central bank and can include bank notes, deposits, bonds, treasury bills and other government securities.
Zhao Qingming, chief economist at the China Financial Futures Exchange's Institute for Financial Derivatives, said: "Safety and liquidity are the two major goals for foreign exchange reserve management in China, with safety being the primary goal. Holding such a huge amount of foreign exchange reserves, it is reasonable that the managers are highly risk-averse, preferring to invest most of the reserves in safe assets."
Some 60 to 70 percent of the nation's forex reserves are held as sovereign debt from advanced economies, as well as financial and corporate bonds with high credit ratings. Other investment targets include equities, bank deposits and financial derivatives, Zhao said.
Supported by the large accumulation of forex reserves, the country has seen stable and fast economic growth in the past four decades, with lower inflation. Thanks to the reserves, China can also benefit from a favorable international trade and financial environment in the long term, Chen Yuan, a former deputy governor of the central bank and former vice-chairman of the Chinese People's Political Consultative Conference, said at a forum on Aug 10.
"Previously, we identified the foreign exchange reserves as an important milestone for economic development and society's core wealth. Now, we have to reposition the foreign exchange market," he added.
According to Chen, faced with new challenges, including foreign exchange rate issues raised by the United States recently, the priority is to keep these reserves safe, and strengthen the renminbi's position globally.
Chen sees potential in foreign exchange rate risks, as the majority of China-reserved foreign assets are in US dollars.
Late last month, the State Administration of Foreign Exchange, or SAFE, China's forex regulator, said the country's foreign exchange reserves held in US dollars accounted for 58 percent of the total by the end of 2014, down from 79 percent in 1995.
Among global foreign exchange reserves, assets held in US dollars comprised 65 percent of the total by 2014, up from 59 percent in 1995, according to SAFE's annual report last year.
For the first time, SAFE made public the currency composition of the forex reserves, after first reporting data to the Currency Composition of Foreign Exchange Reserves, or COFER, an International Monetary Fund database, in 2015.
According to COFER, which keeps quarterly data on the currency composition of official foreign exchange reserves, the world's forex reserves reached $11.59 trillion in the first quarter of this year. Some 58.14 percent of the total was in US dollars, compared with 1.8 percent in renminbi.