China Keeps Its Faith, and Cash, in U.S. Treasuries

Tuesday, 09 Mar 2010 10:54 AM

By Hans Parisis

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China rarely reveals its thinking about the investment of its foreign-exchange reserves.

However, Yi Gang, director of the State Administration of Foreign Exchange and deputy governor of the People's Bank of China, made some interesting statements regarding the yuan and the role of the dollar, U.S. Treasuries and gold in Beijing’s investments during a news conference at the annual legislative session of the National People's Congress on Tuesday.

Highlights of his comments:

• China will keep the exchange rate of the renminbi/yuan “basically stable.”

• The yuan’s exchange rate will be kept at a reasonable, balanced level while the government continues to improve the currency’s mechanism.

• The currency’s exchange rate is decided by market demand.

• There are different opinions within China about the yuan’s exchange rate.

• Chinese investments in U.S. Treasuries are “market investment behavior … We do not want to politicize these investments ... We are a responsible investor and in the process of these investments we can definitely achieve a mutually beneficial result … SAFE (the State Administration of Foreign Exchange) has built a moderately diversified currency structure including the dollar, euro, Japanese yen, etc.”

• “China’s relatively high interest rates and some CNY (yuan) appreciation expectations may attract some crossborder arbitrage capital. Companies increasingly prefer to hold CNY assets while borrowing in foreign currencies.” Nevertheless, the yuan’s exchange rate will be kept stable at a “reasonable and balanced level.”

• “Gold is not a bad asset, but currently a few factors limit our ability to increase foreign-exchange investment in gold.”

He also said that while China's gold reserves (at 1,054 metric tons) are the fifth-largest in the world at current prices. He said gold is only a small part of its foreign-exchange reserves and the past 30 years have shown that the return on gold hasn't been great due to price swings.

He said China will be “cautious” about adding more gold to its foreign exchange reserves and that it will never become a big part of its overall portfolio.

Also, given China's heft as a gold buyer, any move Beijing makes to purchase the precious metal would “certainly” increase gold prices.

Private holdings of gold held by Chinese individuals have been estimated at more than 3,000 tons. (As of October 2009, gold exchange-traded funds held 1,750 tons of gold for private and institutional investors. As of June 2009, the International Monetary Fund held 3,217 tons of gold, which had been constant for several years.)

Bottom line: With its foreign exchange reserves, China will continue to buy U.S. Treasuries and, consequently, dollars and allow only a gradually small appreciation of the yuan in the future.

© 2014 Moneynews. All rights reserved.

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