It is common practice for public figures accused of incompetence to write editorials in their own defense. China’s foreign exchange regulator, the State Administration of Foreign Exchange (SAFE), was compelled to do so three times in one week in late July. It remains the subject of popular anger in online forums. SAFE’s crime, netizens say, is “squandering the blood and sweat” of Chinese workers.
At issue is the organization’s handling of China’s massive foreign-exchange reserves, two-thirds of which are in US dollars. The value of these reserves has declined 5% against the renminbi over the last 12 months. Judging from analysts’ generally sour outlooks for the US economy, it may continue to do so for some time.
This is not due to any incompetence, or even any decision, on SAFE’s part: The dollar is clearly being pushed down by external factors, and SAFE does not set the exchange rate. And yet there is still griping over SAFE’s performance. Rabid economic nationalists have been calling for Beijing to ditch the US dollar for years, but what was once considered an extremist attitude is rapidly attracting more moderate adherents.
“As the largest foreign holder of US Treasuries, either a default or a downgrade would bring huge losses [to China],” noted Yu Yongding, a former advisor to China’s central bank, in a recent essay calling for China to free itself from its “dependence on the dollar.”
This is surely frustrating for SAFE. First, the administration isn’t in charge of setting China’s currency strategy; it follows the State Council’s orders. And the State Council currently wants SAFE to continue buying US$64 million of forex an hour to keep the renminbi from appreciating.
As SAFE (rather clumsily) explained, it will never really record a loss on its dollar investments; the only way it could do so would be if it used some of those dollars to buy back renminbi – which would aggravate an already quite worrisome inflation problem.
I’m on your side
More galling yet is that SAFE itself appears to agree with some of its critics. Zhou Xiaochuan, the governor of China’s central bank, has repeatedly called for the reserves to be reduced. Guan Tao, head of SAFE’s international balance of payments department, has called on the State Council to increase the renminbi’s flexibility.
More deserving of criticism, perhaps, is the newly aggressive strategy of sovereign wealth fund China Investment Corporation (CIC). CIC is China’s US$200 billion, actively-managed sovereign wealth fund. As with all such funds, the trick is for CIC to achieve genuine independence from politicians ever-tempted to take a slice out of the pie. This can either be via subtly influencing sub-optimal resource allocation – see Saudi Arabia – or blunt pillaging – see Argentina.
CIC’s track record is decidedly mixed, with high-profile blow-ups in 2008 and 2009, followed by a 23% profit rise in 2010. But performance aside, CIC has a chink in its armor, in the form of a murky relationship with Central Huijin Investment, the government’s domestic “asset management” arm.
In theory, China’s politicians could use this loophole to siphon off funds from CIC and SAFE, funneling them into favored projects (and bailouts for favored firms) back home. That would be bad for CIC, bad for a balanced economy, bad for inflation, and bad for taxpayers.
CIC claims to maintain Chinese walls between its foreign and domestic (read: Huijin) divisions – while refusing to release any information on Huijin’s financials. For all the anger of China’s netizens, the biggest long-term threat to the country’s sovereign wealth funds may not be foreign markets, but politicians back home.
From “I can haz international funds?” by Will Moss, Imagethief.com, August 15
After seven years and change in China, it’s hard not to come to the conclusion that the purpose of the Chinese banking system is to keep you from doing anything useful with your money. I would bulldoze a field of spaniel puppies and nursery schoolgirls in fairy costumes to avoid a trip to the bank. Every trip to a big, state-owned bank is like the scene from the end of “Beetlejuice” where Michael Keaton is in the waiting room for hell with a 10-digit ticket while they serve number 14.
It’s not so much the magnitude of the numbers as the glacial pace of the transactions. Every transaction seems to involve a mortgage application in octuplicate and the structuring of some kind of derivative for a grandmother who speaks only a Guangxi provincial dialect, or the hand-counting of RMB100,000 in cash pulled from a man-bag. Surely no simple, retail banking transaction could take a freaking hour.
But of course it could. By far the most confounding thing I’ve had to do is change large amounts of renminbi into foreign currency. The catch, of course, is that the renminbi isn’t freely convertible. Oh, sure, it’s nominally convertible, but only in the same sense that nominally I could become a Navy SEAL.
A sensible man suggested that I leave everything in renminbi. After all, the renminbi is still appreciating in US dollar terms, and the government is unlikely to allow any of the big four banks to submarine. But as useful as the renminbi is for settling bills in China (where a zero is added to my rent approximately every six months), it is completely illiquid as far as the rest of the world goes. Should I have a sudden need for money overseas, my accumulated renminbi savings would be worth about as much as a cargo container full of used cat litter. Interesting perhaps, but hard to pass off as legal tender.