HI Market Views Commentary 11-17-2019
According to analysts, China is heavily influenced by the US dollar, but now, with the risk of “disengagement”, Beijing is silently diversifying its reserves to reduce its dependence on the world’s largest reserve currency..
A recent report by ANZ Research says the ongoing trade tensions between China and the United States «increased the risk of financial disconnection» between the two largest economies. The White House has reportedly considered some restrictions on US investment in China, such as delisting Chinese stocks from US exchanges..
Therefore, according to the ANZ forecast, Beijing will manage its risks by diversifying its foreign exchange reserves into other currencies, as well as increasing its «shadow reserves».
«While China still places a large proportion of its foreign exchange reserves in US dollars … the pace of diversification into other currencies is likely to accelerate in the future.», – according to the ANZ report, while adding that as of June, the share of the dollar in China’s foreign exchange reserves was about 59%.
While there is no exact figure on the distribution of China’s foreign exchange reserves across currencies, ANZ told CNBC that it believes new purchases will include the British pound, Japanese yen and euro..
Meanwhile, Beijing is gradually reducing its holdings of US Treasuries, which it still actively invests in – China was the largest foreign holder of US government bonds until June, when it was surpassed by Japan. Since its peak in 2018, China has cut its assets by $ 88 billion in the past 14 months, DBS said..
China held $ 1.11 trillion in U.S. bonds in June, according to U.S. Treasury data.
At the same time, Beijing continues to expand its gold purchases, and its official gold holdings are holding at record levels of 1959.5 tons in October..
Chinese companies are also highly prone to fluctuations in the US dollar, noted Pinebridge Investment global economist Paul Xiao, who pointed to over $ 500 billion in Chinese external corporate debt..
«A lot of this is housed in US dollars, which can be a problem for Chinese corporations», – wrote Xiao in an email on CNBC explaining that it happened at the height of the U.S.-China trade war when the dollar «much» strengthened against the yuan. This has led many Chinese firms to sell their assets as many of their liabilities are still denominated in dollars, he explained..
«Thus, the diversification of its foreign exchange reserves is largely in line with recent policy moves by the Xi administration to focus on China’s trade relations outside the United States. China and more broadly the Asian region remain highly volatile in the US dollar », – said Xiao.
Another important way that China could deal with this risk is through the creation of other forms of assets, which ANZ has named «shadow reserves».
«In fact, we believe that the Chinese government has already carefully diversified its offshore portfolios to include alternative investments.», – says ANZ report.
In recent years, Beijing has been increasing its share of alternative investment, and much of this has happened through multiple investment vehicles such as its state-owned companies and banks, as well as funds jointly managed with other countries, according to ANZ analysis. ,
These investments include stocks as well as lending through state-owned banks – especially in line with his giant initiatives. «Belt and road», analysts write.
The Chinese State Foreign Exchange Administration (SAFE), which manages China’s foreign reserves, has four investment properties: Huaxin in Singapore, Huaou in London, Huamei in New York, and Hua’an in Hong Kong. They are affiliated with other offshore organizations that actively invest in stocks.
The funds in which he has invested include the China-Africa Development Fund and the China-LAC Cooperation Fund, which funds projects in Latin America and the Caribbean. Beijing is increasing its stake in these funds or increasing capital in regional banks. He also exchanged loans for capital, according to the ANZ report..
«These offshore investments, called China shadow reserves, totaled $ 1.86 trillion as of June 2019», – says ANZ post.
China’s foreign exchange reserves stood at around $ 3.1 trillion as of July. «SAFE has now adopted a high risk aversion strategy while managing a reserve base of USD 3.1 trillion, and diversification will help mitigate risk across its reserve portfolio», – says Siraj Ali, chief operating officer of AJ Capital.
The US dollar is currently «reserve currency» the world – about 58% of all foreign exchange reserves in the world, according to the IMF, are denominated in US dollars, and about 40% of world debt is denominated in dollars.
«The global financial system is heavily focused on US dollars, and larger economies, including China and the euro area, have pushed to move towards a multipolar world of reserve currencies.», – chief economist at APAC S told CNBC in an interview&P Global Ratings Sean Roach.
«For China, this would help reduce reliance on financial conditions in US dollars and, over time, give the yuan more opportunities to play a larger role in the world», – he added.
The second largest economy in the world seeks a wider and more global use of the yuan.
The efforts being made are likely to continue to reduce the world’s dependence on the dollar, Roach said. This will include denomination of commodity contracts in currencies other than the dollar and diversification of reserves, he said..