PARTE III: MARCO EMPÍRICO
CAPÍTULO 7: Conclusiones y Recomendaciones
1.2. Los Estilos de Aprendizaje: Terminología
Traditionally, the State Administration of Foreign Exchange (SAFE), which is a subsidiary of the PBC, is responsible for managing foreign reserves held by the central bank. The foreign reserves are recorded on the PBC's balance sheet and invested in low risk assets such as long term government bonds. In recent years however, the PBC has been making other uses of its foreign reserves.
Some foreign reserves were used to recapitalize the large state owned financial institutions. As a part of financial reforms, the Central Huijin Investment Company Limited was established in December 2003 as an investment subsidiary to improve the capital quality of the big state owned banks to prepare them for IPOs. The purpose of the Central Huijin is to improve corporate governance and initiate reforms of the banking sector, by creating an organizational
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structure where the PBC and the China government can operate as shareholders of the state owned banks. It had a registered capital of 50 million RMB which came from the Ministry of Finance, but its investment fund came from the PBC. From 2003 to 2008, the PBC made a few capital injections through Huijin to different state owned commercial banks and insurance companies, some of which came out of the foreign exchange reserves. For example, it took a total of $45 billion from foreign reserves to invest in the Bank of China, the China Construction Bank and its subsidiary at the end of 2003. It made a capital injection of $15 billion to The Industrial and Commercial Bank of China in 2005.
Table 12 Huijin's investment
Source: CEIC
Table 12 shows a list of capital injections of the Central Huijin Investment Company to
Institutions Date Amount (billions) Miscellaneous
Bank of China Dec. 2003 22.5 $US
China Construction Bank Dec. 2003 20 $US
Jianyin Investment Company Dec. 2003 2.5 $US
Bank of communication June 2004 3 RMB
Industrial and Commercial Bank of China April 2005 15 $US
Galaxy Security Company June 2005 10 RMB
Shenyin & Wanguo Security Company Aug . 2005 2.5 RMB Plus 1.5 Billion RMB in loan
Guotai Junan Securities Co Aug . 2005 1 RMB Plus 1.5 Billion RMB in loan
China Galaxy Financial Holding Co. Aug . 2005 5.5 RMB
China reinsurance (group ) Co. April 2007 2 $US
China Everbright Banks Nov. 2007 20 RMB
National Development Bank Dec. 2007 20 $US
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state owned companies18. Some of the capital injection came from the foreign reserves directly
(i.e. those amounts denominated in US dollars), some were said to come from repaid central bank loans (i.e. the 3 billion RMB injection to the Bank of Communication)19
In September 2007, the China Investment Corporation (CIC) was established with the intent of utilizing the accumulating reserves for the benefit of the state. Special Treasury bonds of 1.5 trillion yuan ($207.91 billion) were issued by the Ministry of Finance to create the capital that the CIC needed. The Ministry of Finance then used the proceeds to purchase foreign exchanges from the PBC and put them under the management of the CIC. The CIC later acquired the Central Huijin Company from the PBC with $ 67 billions and made it a full subsidiary. As a result, many of CIC's investments and capital injections are still made under the name of Huijin. The net effect of the establishment of the CIC on the PBC's balance sheet is a total reduction of $140.9 billion in foreign reserves.
. If I assume that all the capital injections are completed within a month and use the exchange rate at the month end to convert the RMB amount to dollars, Huijin has injected an overall of $108.4 billion into state owned banks and the Galaxy Security company. As described above, some of the injections are taken from the foreign reserves. If one wants to consider the foreign exchange held by China as a country, this amount should be added back.
The CIC makes occasional announcements about its investment, but the overall transparency of its investment strategy is low. Compared with the SAFE, the CIC makes more aggressive investments in equities. Table 13 shows an (incomplete) list of its investment projects.
18In September 2007, Huijin had effectively become a subsidiary of the CIC, which will be covered later.
However it keeps operating and serving its purpose of recapitalizing stated owned banks.
19
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Besides the PBC and its subsidiaries, financial firms and individuals of China are also allowed to make investments in foreign markets and thus hold some foreign exchange. Since 2001, domestic investors, including individual residents, have been allowed to invest their own foreign exchange in B-shares20. Starting from 2002, qualified foreign institutional investors (QFII)
have been allowed to invest in the domestic capital market. Since 2004, insurance companies have been allowed to use their own foreign exchange to invest in the international capital market. When restrictions on qualified domestic institutional investors (QDII) were lifted in April 2006, domestic fund management companies (asset management companies) began to establish and sell products (mutual funds) to invest in the international capital market, first in a trial run by Hua An Fund Management in September 2006, and then in earnest from September 2007, after the China Securities Regulatory Commission (CSRC) established a new set of rules. In 2007, firms were allowed to hold foreign exchange in a current account at their discretion. In the same year, annual foreign exchange purchases and sales quotas for individuals were raised to US$ 50,000 to meet their needs for holding and using foreign exchange
Table 13 CIC's incomplete list of investment
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China B shares are virtually the same as common shares (which are referred to as A shares), except that they were originally developed as stock shares for foreign investors. They are listed on Shanghai and Shenzhen stock exchanges and are denominated in RMB, but are payable in foreign currency. Before 2001, only foreign investors were allowed to purchase B shares.
Institutions Date Amount ($billions) Type of investment The Blackstone Group May 2007 3.0 Pre-IPO, 9.4% equity
China Railway Group Nov. 2007 0.1 Pre-IPO, equity
Morgan Stanley Dec. 2007 5.0 mandatory convertible securities , 9.9% equity Visa Mar. 2008 0.1 Pre-IPO, equity
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As China is moving to a more liberal foreign exchange policy, the PBC and state banks are no longer the only institutions that can hold foreign exchange legally. However, since monetary sterilization is solely implemented and managed by the PBC, and I am interested in whether the PBC's foreign reserves investment return is enough to cover its sterilization cost, I only take into consideration the foreign reserves listed on the balance sheet of the PBC in this paper. All the other foreign exchange not currently held by the central bank are ignored in the estimation.
China has experienced a rapid increase in foreign reserves since 2003, due to the recorded twin surpluses in the current and capital accounts. Figure 4 shows the evolution of China's balance of payments. The current account surplus clearly contributes the most to the huge growth in foreign reserves. It was $12 billion in 1990. It grew rapidly and reached $249.9 billion in 2006, then $426.1 billion in 2008 and dropped back to 297.1 billion in 2009 due to a slowdown in exports. A closer look reveals that the current account surplus has come mainly from the trade surplus, the share of which in the current account surplus was 84% in 200921
21
CEIC database, 2009
. At the same time, net exports grew from 2.5% of GDP in 2004 to 8% of GDP in 2008 and then 5% in 2009. The contribution of net exports to GDP growth also increased dramatically from an average of 3% from 2001 through 2004 (0.36 percentage points of GDP growth), to an average of 21% from 2005 through 2007 (2.4 percentage points of GDP growth). It dropped to 8% in 2008 due to a change in the economic conditions abroad. The capital account, mainly coming from FDI, was mostly positive during the period 1995 to 2009 as well, implying a net capital inflow. Since 2001, China has received annual FDI in excess of USD 40 billion. However the error and omission term was mostly negative before 2002, implying a net unrecorded capital outflow.
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The sign was reversed after 2002 and before 2009, when the global financial crisis took place.
Figure 4 Balance of Payment of China
The rapid accumulation of foreign reserves, combined with China's crawling peg exchange rate, calls for sterilization. Sterilization happens when the monetary authority tries to gain control of the reserve money in face of an exogenous increase in the NFA, by taking opposite actions with the net domestic assets. In other words, as the NFA increases, we may see the NDA decrease as a result of sterilization. Reserve money is kept unchanged in this way, preventing the broad money supply from soaring. However, an increase in the reserve money or the broad money supply per se does not necessarily mean that the PBC has lost control. The central bank may want the monetary base to increase anyway to keep up with economic growth, as in China's case. Figure 5shows that both the reserve money and the broad money supply have been increasing in China as foreign reserves accumulate. Nevertheless the reserve money increases at a slower pace especially after 2005, indicating the operation of sterilization. The
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U S b illio n sCN: BoP: Current Account CN: BoP: Capital Account CN: BoP: Net Error and Omission
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following section gives an overview of China's major sterilization tools.
Figure 5 reserve money and the broad money supply in China,