Researchers advise Beijing to reduce holding of US debt
Subprime mortgage-backed bonds seen as offering value
Carol Chan and Bloomberg 9 February 2009
China should sell a “moderate” amount of its holding of United States treasuries as the yields decline amid the global financial crisis, according to researchers under the Ministry of Commerce.
They also suggested Beijing buy subprime mortgage-backed bonds that are “seriously undervalued” to avoid risks as well as enhance investment returns.
Wang L, at the Ministry of Commerce’s Research Institute of Foreign Trade and Economic Cooperation, and Fan Xin at the Beijing-based University of International Business and Economics, proposed that China should readjust the US dollar assets of its foreign-exchange reserves to avoid further exposure to the risks of the US capital market.
In an article in the February edition of China Finance, a central bank-affiliated magazine, they proposed the government sell a “moderate” part of its US Treasuries holdings as the yields have declined due to the global financial crisis.
“China should instead buy some high-quality subprime mortgage-backed bonds, those that are seriously undervalued,” the researchers wrote.
When the financial crisis eased, China could sell the subprime debt and buy treasuries, enabling it to avoid risks and improve returns, they said.
China, which holds the world’s largest foreign reserves of US$1.95 trillion as at the end of last year, is by far the largest creditor of the US.
It was estimated that the country had US$1.7 trillion in investments in the US at the end of last year, including treasuries and equities, the Council of Foreign Relations’ Centre for Geo-Economic Studies said in a report.
Authors Brad Setser and Arpana Pandey wrote that China held close to US$900 billion of treasury bonds at the end of the fourth quarter. It also owned US$550 billion to US$600 billion in agency bonds, US$150 billion in corporate bonds, US$40 billion in US equities, as well as US$40 billion in short-term deposits.
Law Ka-chung, chief economist and strategist at Bank of Communications, Hong Kong branch, also said China should use a small portion of its foreign reserves to buy subprime debt.
Qu Hongbin, HSBC’s chief economist for China, said there were many suggestions on how to improve the value of mainland foreign reserves.
Mr. Qu said the government should not buy too much subprime debt because this would defeat the foreign reserve management purposes of safety and liquidity.
Meanwhile, a report by the Ministry of Finance’s research institute suggested that Beijing should “actively guide” the yuan’s exchange rate to depreciate to about 6.93 yuan (HK$7.87) against the dollar from about 6.83 yuan now to help maintain economic growth and bolster employment, despite the US accusing China of manipulating the exchange rate.
The report, published in the Shanghai Securities News, also said China should increase purchases of commodities from abroad and build up energy reserves to offset pressures on the yuan.
The central bank should continue to cut lending rates “by relatively large margins” in the first half to boost investment and prop up the real estate and stock markets, the report said. Beijing has cut interest rates five times since September. The one-year deposit rate stands at 2.25 per cent.
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Researchers advise Beijing to reduce holding of US debt
Subprime mortgage-backed bonds seen as offering value
Carol Chan and Bloomberg
9 February 2009
China should sell a “moderate” amount of its holding of United States treasuries as the yields decline amid the global financial crisis, according to researchers under the Ministry of Commerce.
They also suggested Beijing buy subprime mortgage-backed bonds that are “seriously undervalued” to avoid risks as well as enhance investment returns.
Wang L, at the Ministry of Commerce’s Research Institute of Foreign Trade and Economic Cooperation, and Fan Xin at the Beijing-based University of International Business and Economics, proposed that China should readjust the US dollar assets of its foreign-exchange reserves to avoid further exposure to the risks of the US capital market.
In an article in the February edition of China Finance, a central bank-affiliated magazine, they proposed the government sell a “moderate” part of its US Treasuries holdings as the yields have declined due to the global financial crisis.
“China should instead buy some high-quality subprime mortgage-backed bonds, those that are seriously undervalued,” the researchers wrote.
When the financial crisis eased, China could sell the subprime debt and buy treasuries, enabling it to avoid risks and improve returns, they said.
China, which holds the world’s largest foreign reserves of US$1.95 trillion as at the end of last year, is by far the largest creditor of the US.
It was estimated that the country had US$1.7 trillion in investments in the US at the end of last year, including treasuries and equities, the Council of Foreign Relations’ Centre for Geo-Economic Studies said in a report.
Authors Brad Setser and Arpana Pandey wrote that China held close to US$900 billion of treasury bonds at the end of the fourth quarter. It also owned US$550 billion to US$600 billion in agency bonds, US$150 billion in corporate bonds, US$40 billion in US equities, as well as US$40 billion in short-term deposits.
Law Ka-chung, chief economist and strategist at Bank of Communications, Hong Kong branch, also said China should use a small portion of its foreign reserves to buy subprime debt.
Qu Hongbin, HSBC’s chief economist for China, said there were many suggestions on how to improve the value of mainland foreign reserves.
Mr. Qu said the government should not buy too much subprime debt because this would defeat the foreign reserve management purposes of safety and liquidity.
Meanwhile, a report by the Ministry of Finance’s research institute suggested that Beijing should “actively guide” the yuan’s exchange rate to depreciate to about 6.93 yuan (HK$7.87) against the dollar from about 6.83 yuan now to help maintain economic growth and bolster employment, despite the US accusing China of manipulating the exchange rate.
The report, published in the Shanghai Securities News, also said China should increase purchases of commodities from abroad and build up energy reserves to offset pressures on the yuan.
The central bank should continue to cut lending rates “by relatively large margins” in the first half to boost investment and prop up the real estate and stock markets, the report said. Beijing has cut interest rates five times since September. The one-year deposit rate stands at 2.25 per cent.
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