The $755b question over China's foreign reserves
Up to 70 per cent of the foreign exchange reserves is in US bonds - and some believe this is disadvantageous and even risky
By Leslie Fong
CHINA had US$440 billion (S$755.4 billion) in foreign exchange reserves at the end of March - and no lack of suggestions from its more thoughtful citizens on what it should do with the money.
The amount is the second largest in the world, after Japan's US$795.4 billion.
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Although no official figures are available, the widespread belief in China is that as much as 70 per cent of that is held in United States Treasury and other bonds.
Not a few among the Chinese intelligentsia have been questioning the wisdom of leaving so much money there.
The rationale for parking the funds in T-bonds, said to have been given some years ago by then premier Zhu Rongji, was that these carried low risks and were yielding decent returns.
To that, the retort was, and still is, that Beijing ought to take a broader view of how the nation's precious reserves can be put to the best use.
An outspoken economist once told The Straits Times tersely: 'We do not need our leaders to act as fund managers!'
To sceptics like him, the argument does not turn on how much interest the T-bonds will fetch - 5.42 per cent a year for those stretching beyond 25 years and just 1.63 per cent for the one-year bills.
It is not even about diversification to, say, Europe and into other equally safe instruments.
The emerging consensus among those not enamoured of leaving the reserves in T-bonds - or any paper assets, for that matter - is that these must be used in a way that makes more strategic sense.
They also believe that given mounting cross-strait tension as Taiwan lurches down the road to independence, leaving funds in the US may be giving hostage to fortune.
'If China and the US should end up fighting each other over Taiwan, then the likelihood that our money will be frozen there cannot be ruled out,' says a scholar who advises Beijing on relations with America.
'It is prudent to start thinking about how we can reduce our exposure.'
Many suggestions have been put forward, including schemes to use the money to alleviate rural poverty or improve the country's infrastructure.
But there is one which all who spoke to The Straits Times seem to agree on - acquire resources which China is going to need before a global scramble for them drives prices sky high.
Says Dr Xin Xiangyang, vice-director of an official think-tank: 'Forget about bonds. Put the money in oil and water.'
He and others who have been thinking and writing on China's vulnerabilities are convinced that China will run short of these two resources sooner than most people realise.
Available data support this line of argument.
Take oil, for instance.
China ended three decades of self-sufficiency in oil when it became a net importer in 1993. By 2002, imports accounted for 37 per cent of oil consumption.
This figure is projected to rise to 63-70 per cent in 2020, according to international estimates, and 46-54 per cent by China's own reckoning.
Such a heavy dependence on imports means that volatile prices and supply disruption are certain to wreak havoc on the Chinese economy.
Hence the increasing calls on Beijing, which is already asking the state-owned oil companies to sign up energy deals wherever they can find them, to spend even more on securing oil and gas supplies - and stockpiling.
Similarly, China is under immense pressure to develop more water resources as industrialisation, weather changes and damage to the environment may soon leave vast parts of the country short of potable water.
According to a study, the water table has been down a metre a year since the early 1970s. This is bad news for the many regions in China that depend on ground water.
Further, with rapid urbanisation, there is not enough water for homes and industries in many northern cities.
For example, Beijing's water resources can support only eight to 12 million but the total population there now hovers around 14 million.
The central government is committed to a massive, and massively costly, scheme to 'transfer water from the south to the north', which, in essence, means diverting rivers northward and westward.
Here, again, is where the reserves can be better spent, or so the argument goes.
Should not some of the money be spent on developing water resources or buying it from neighbouring countries with plenty to spare?
But there is also agreement among advocates that the exit from T-bonds has to be managed very carefully in order not to undermine the US economy on which China's own depends - or upset global financial markets.
Says the expert on US-China relations: 'Doubtless there are also those who see our reserves as a kind of leverage on Washington, a weapon to be used.
'But that is a two-edged sword. Causing financial turmoil in the US is likely to hurt us as well.
'Thus we have to be clear about our purpose, which must be to use our money for our own long-term good.'
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