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Business
Print Edition> Business
UPDATED: December 2, 2013 NO. 49 DECEMBER 5, 2013
Market Watch No. 49, 2013
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OPINION

Putting Forex Reserves to Better Use

Decisions made at the Third Plenary Session of the 18th Central Committee of the Communist Party of China signal a new round of comprehensive reforms for the world's second largest economy, highlighted by further opening up. In the process, reform in the financial sector, particularly foreign exchange (forex) reserve management, is bound to unleash enormous growth potential.

China's forex reserves have reached $3.7 trillion, exerting a huge impact on the Chinese economy. Forex reserves have played a positive role in balancing international payments, improving China's external payment ability, stabilizing the exchange rate of domestic currency and offsetting the effects of the global financial crisis. However, too much in forex reserves could compromise the independence of monetary policies and result in low reserve investment yields. This has become one of the most important strategic issues concerning China's economic and financial safety. Therefore, China should change its traditional management mindset toward forex reserves and innovate.

According to estimations, the optimal forex reserves for China should be $800 billion to $1 trillion. With high liquidity, this should be used to pay off external debts, pay for imports in case of a trade deficit, to cope with unusual fluctuations in currency exchange rates and to respond to global and domestic financial turbulence. Forex reserves beyond the optimal amount should be used to support the real economy or for professional investment purposes.

First, China can set up platforms to use forex reserves to finance domestic companies' overseas expansions. By setting up a forex investment fund, China can push forward overseas direct investment, merging and acquisitions from Chinese companies. Such funds can also support the purchase and import of high value-added equipment and technologies and facilitate the establishment of domestic companies' overseas research and development bases. More technological innovation could help China's production move up the industrial value chain.

Second, China should establish a multi-layer overseas investment fund system to manage forex reserves by dividing investment destinations. Geographically, investment regions include the European market, the American, Asian and African markets. They can also be divided into the BRICS, APEC and OPEC markets. Meanwhile, a national investment organ should be established for targeting special markets. This will not only strengthen professional study of targeted markets and help manage investment risks, but will also achieve the highest returns on investment.

Third, China can offer financing to sectors that it wants to support via asset securitization. Securities can be issued using part of the country's forex reserves as collateral to finance strategic projects, such as affordable housing and infrastructure construction projects.

Finally, China should establish more sovereign wealth funds. Sovereign wealth funds, having gained popularity in recent years, have played an increasingly important role in the global economy. Sovereign wealth funds reached $5.2 trillion by the end of 2012, up 8 percent from 2011. They are expected to exceed $5.6 trillion this year and surpass the official total amount of global forex reserves in 2014. Compared to the flourishing of sovereign wealth funds in other countries, China only has one such funds company—China's Investment Corp. China should consider setting up new sovereign wealth funds to solve domestic problems pertaining to its aging society and energy deficit.

This is an edited excerpt of an article by Zhang Monan, an associate researcher with the State Information Center, previously published in China Securities Journal

THE MARKETS

Cinda IPO

China Cinda Asset Management Co. Ltd. launched an initial public offering (IPO) in Hong Kong on November 28.

With a planned issuance of 5.32 billion H-shares, Cinda has set a range of HK$3 ($0.39) and HK$3.58 ($0.46) per share. It expects to raise HK$16.97 billion ($2.19 billion). Shares of the company will be listed on December 12 on the main board of the Hong Kong stock exchange.

The IPO marked the first of its kind for Chinese financial assets management companies. Cinda, as one of the big four state-owned asset management firms, was restructured as a joint-stock company in June 2010. It focuses on collecting banks' bad debts, bankruptcy management, outbound investment, securities trading, investment and financial risk counseling.

The company said that the funds raised through the IPO are intended to replenish its capital, 60 percent of which will be used to develop its core business of bad asset management, with the remainder to be used as capital injection to subsidiary companies and financial investment and asset management.

Stocks Rally

A pair of Chinese firms, 500.com Ltd. and Sungy Mobile Ltd., saw their stocks soar on November 22 when they made their debut on the U.S. stock markets.

After its first day of trading on the New York Stock Exchange, stocks of China's leading online sports lottery service provider 500.com Ltd. closed at $20.01 per share, up almost 54 percent from the price of its IPO.

On the same day, stocks of Sungy Mobile, a leading global provider of mobile Internet products and services, rallied nearly 19 percent to close at $13.35 a share. It set its IPO on the floor of NASDAQ Global Market under ticker symbol GOMO.

Sungy Mobile provides applications and mobile platform development. Its platform product GO Launcher EX manages apps, widgets and functions on Android smartphones and serves as users' first entry point to their phones.

NUMBERS

4.63 tln yuan

Profits from industrial enterprises above the designated size—principal business revenue of more than 20 million yuan ($3.15 million)—from January to October, a 13.7-percent increase year on year

35

The number of industrial sectors that witnessed higher profits from January to October, compared to the same period last year

55.5%

Year-on-year growth rate in profits of the power and heat-generation sector from January to October

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