Forex Reader

– Pushpa Sathish, Staff Writer

Rodrigo de Rato, the International Monetary Fund’s managing director, warns that “the high levels of credit and high levels of investment could cause a risk in China.” The country should take another look at the regulatory controls it has imposed to curb excessive foreign investment. De Rato suggested that the authorities let the value of the yuan be driven by the market to bring about a more flexible exchange rate.

China holds the world’s largest foreign exchange reserves and is struggling to contain foreign inflows to prevent adding to its already huge trade surplus. An increase in bank loans and investment leaves the market open to inflation and a debt crisis if projects fail. The Chinese economy is already growing rapidly – 10.7 percent in 2006, thanks to its large volume of exports and investments. And it naturally follows that inflation is up – consumer prices went up by 2.8 percent in December, an increase over the 1.9 percent rise in November.

Prime Minister Wen Jiabao knows what has to be done though – he stressed that sharp fluctuations in the currency should be prevented. The yuan has risen nearly 6 percent over the past 18 months.

– Pushpa Sathish, Staff Writer

China’s State Administration of Foreign Exchange (SAFE) is hoping to “actively promote the basic balance” of the Chinese balance of payments by relaxing rules so that inflows are restricted and outflows encouraged. According to SAFE’s director Hu Xiaolian, this move is an attempt to stop China’s massive foreign exchange reserves from growing further. As the forex amount grows, there’s more pressure from the international community for China to let the yuan appreciate, an initiative, which if taken, will significantly hurt China’s booming export market.

Individuals, banks, companies and insurers will be allowed to hold double the amount of foreign currency than permitted presently, to invest in overseas stock options. On the other hand, short-term capital inflows will be strictly controlled as China tries to bring down its trade surplus. The nation, which is divided over how best to use its large forex reserves, is looking to slow the appreciation of the yuan by diverting foreign funds from the government to the common man.

In another corner of Asia though, such concerns apparently do not exist. While central bankers in the world’s largest continent are alarmed at the large amounts of capital inflows into Malaysia, the country’s second finance minister, Nor Mohamed Yakcop, said that there was no reason to panic. The inflows, which are due to the ringgit’s recent rise, may adversely affect economic and foreign policy, according to the bankers. However, Nor Mohamed said that Malaysia was “very happy” with the fund inflows, and brushed aside concerns that the ringgit’s appreciation would hurt exports.

Different reactions to similar situations! But then, China is way ahead of Malaysia in the foreign exchange game.

– Pushpa Sathish, Staff Writer

It’s not enough that China already holds the world’s biggest foreign exchange reserves – the Asian country has just made a net profit of $29 billion from just managing its forex hoard of $1 trillion. At least $44 million of that amount is believed to have come through interest earnings; around 66 percent of the reserves are dollars which bring in an average of 5 percent as interest.

With additional income like this, China is definitely going to turn a deaf ear to American and European voices that call for the appreciation of the yuan. The country’s central bank, the People’s Bank of China, prevents foreign currency from causing local inflation by mandating banks to deposit 9 percent of their reserves with it.

– By Pushpa Sathish, Staff Writer

There’s been a lot of talk about China’s vast foreign exchange holdings, and never-ending debates on the best use that it can be put to. While analysts and economists are calling for a decrease in the dollar amount and a drop in the U.S. Treasuries, the latest suggestion comes from the country’s vice president – Zeng Peiyan feels that a part of the $1 trillion should be used to strengthen China’s strategic energy reserves.

China needs to consolidate its mid- and long-term plans for its coal industry, besides expediting the process of exploring for oil, natural gas and other resources like uranium, said Zeng in a report to China’s legislature body, the Standing Committee of the National People’s Congress.

– By Pushpa Sathish, Staff Writer

Has China’s foreign exchange reserves crossed the $1 trillion mark or not? That is the trillion-dollar question! While a news report on the state television channel CCTV stated that the Asian country’s forex holdings touched the $1 trillion level, spokeswomen for both the currency regulator, the State Administrator of Foreign Exchange (SAFE), and the country’s central bank, The People’s Bank of China, categorically denied that the report was true.

What’s confusing in this scenario is that the TV report cited figures from SAFE to back its claim, but did not say exactly when the reserves crossed the magic mark. China is already in the eye of a currency storm for not allowing its currency to appreciate; other countries trading with China contend that the yuan is being artificially devalued.

Are fears of more stringent calls to devalue the nation’s currency keeping SAFE and the central bank from admitting that the reserves have risen as stated? China’s forex holdings are growing at the rapid rate of $20 billion a month, thanks to massive inflows from foreign direct investment, speculation on the appreciation of the yuan, and an increasing trade surplus.

The latest report dated October 13 from the central bank stated that China’s foreign exchange reserves stood at $987.9 billion at the end of September. Anyone who can add a bit will certainly be speculating that the reserves have indeed crossed the $1 trillion mark!

– By Pushpa Sathish, Staff Writer

China should protect itself from a strong depreciation in the dollar by using its hoard of foreign reserves to invest in strategic resources outside the country, according to Xia Bin, a researcher with the Development Research Center under the State Council. China has the world’s largest store of foreign reserves; the figure stood at $987.9 billion at the end of September.

Xia estimates that this amount is $300 billion in excess, and that the country’s finance ministry should use this amount to buy oil and medical equipment from abroad. The dollars will have to be purchased from the People’s Bank of China, the nation’s central bank, as forex reserves are deemed an asset on the bank’s balance sheet.

The researcher went so far as to say that the central bank and the State Administration of Foreign Exchange (SAFE) were not suited to manage China’s foreign reserves as they focused more on macroeconomic policies rather than investment decisions. He suggested that the Central Huijin Investment Corp., an investment arm under SAFE, be changed into an independent agency and given responsibility for the country’s surplus forex reserves.

– By Pushpa Sathish, Staff Writer

China has soared ahead of the rest of the pack in the race for the largest foreign currency reserves; at the end of September, the figure was almost touching the $1 trillion mark. According to the People’s Bank of China, the Asian country had $988 billion, an increase of 28.5 percent from a year ago.

Chinese exports are in high demand all over the globe, simply because they are inexpensive and easily available. The low value of the yuan allows China to mass-produce low-cost products meant for the export market. As a result, the country’s import-export gap reached $102 billion last year, and even more astounding, China’s forex reserves are growing at the unbelievable rate of $30 million every hour.

The economy is flush with cash even as the government is being accused of keeping the yuan artificially low in order to keep down the costs of exports. The United States on the other hand, has a current account deficit of $805 billion, ironically, due to the high demand for cheap Chinese goods. Retailer Wal-Mart buys the majority of non-perishable goods from China.

China is taking measures to reduce currency inflow by putting curbs on foreign investment in the country, especially in its booming real estate sector. It is also opening avenues of investment outside its borders by relaxing capital control measures.

With the reserves exceeding the GDP of all economies except the largest eight, China must cut down on its excess capacity, says Richard Duncan, head of investment strategy at ABN Amro Asset Management Ltd. He adds that the only reason they’ve been able to avoid a crisis is because of the rapid growth of exports.

Much has been written about music; there are those that have waxed eloquent on its charms like William Congreve, "Music has charms to soothe the savage beast, to soften rocks, or bend a knotted oak", but this is the first time I’ve heard of dulcet strains contributing to the GDP of a country.

Zimbabwe, which hit the headlines a few weeks ago for its currency change measures, is turning to the most unlikely source for its foreign exchange earnings – music. The country’s Minister of Education, Sport and Culture, Aeneas Chigwedere, put forward this unusual proposal at the launch of a five-year strategic plan for artistes in Harare recently.

Music is also being seen as an employment opportunity once students step out of school, which is why the Zimbabwean government is working towards uplifting the welfare of musicians in the country.

Following a strong showing by the public and external finances of six Gulf countries including Bahrain, the London-based Moody’s Investors Service has upgraded their long-term foreign and domestic currency government bond ratings to the A3 category. On the plus side for the GCC states are the continuous rise in the price of hydrocarbons over the past five years and the fact that they have used the receipts in exports judiciously, saving more and spending more on capital expenses than on current costs. The negative aspects are the escalating nuclear tension between the US and Iran, the political scenario in Iraq, and the threats from militancy and sectarianism, according to Tristan Cooper, a vice-president at Moody’s London office. The Gulf Daily reports:

Moody’s said that the conspicuous improvement in the economic strength of the Gulf states justifies the ratings upgrade as it has enhanced the governments’ ability to withstand both political and economic shocks. “Given the GCC governments’ large net asset positions and low levels of gross debt, it would take a severe and sustained adverse political scenario to cause a government bond default either in local or foreign currency,” said Cooper.

It’s good news for the Philippines that the country is growing economically and thus able to keep one step ahead of the debt collectors. With the reputation of being one of the most active debt issuers in Asia and spending most of its annual budget for the repayment of external debt, the country’s central bank announced that its total foreign debt dropped by 3.8 percent to $53.9 billion at the end of June.

The Bangko Sentral ng Pilipinas (BSP) said in a statement on its website that the net payments made by government and private sector borrowers was in excess of $2 billion. These payments were partly compensated by upward forex revaluation adjustments on liabilities denominated in yen and euro, and because of the large number of investments by non-residents in the country’s international debt papers.