Ongoing trade tensions with the U. The White House reportedly considered some curbs on U. Beijing will therefore manage its risk by diversifying its foreign exchange reserves into other currencies, ANZ predicted, as well as build up its "shadow reserves. Although the exact allocation of China's foreign exchange reserves in different currencies isn't known, ANZ told CNBC it believes those would include the British pound, Japanese yen and euro.
Meanwhile, Beijing is gradually reducing its holdings of U. Treasurys, which it is heavily invested in — China was the largest foreign holder until June, when it was surpassed by Japan. According to data from the U. At the same time, Beijing has been going on a gold buying spree, with its official gold reserves holding at record levels of 1, Accordingly, the United States would become the largest world energy producer surpassing Saudi Arabia and Russia, and it would change from a main oil importer to be a major energy exporter.
This industry has great potential because there are huge shale gas reserves available on earth to be exploited and the combustion of shale gas emits much lower carbon dioxide CO2 and sulfur dioxide than does the combustion of coal or oil.
Even though a few hurdles like environmental standards, regulatory structure and gas export restriction have to be cleared, long-term capital investment is crucial to accelerate the expansion of this industry.
While the gas field in Barnett of Texas is well developed, shale gas drilling in Marcellus of the Northeastern region is gaining strong momentum. While the shale gas industry takes shape in the U. The globally proved reserves of shale are huge.
According to the U. Energy Information Administration EIA , recoverable reserves of shale gas in 32 countries are estimated to be over trillion cubic meters, about seven times larger than the global conventional natural gas reserves. Among them the top countries include China 36 trillion cubic meters , Argentina In the recent years a specter is again haunting Europe — this time is not the specter of communism, but that of the home-made financial crisis originated from sovereign debt woes of the southern European countries.
Although the ECB president Marrio Draghi acted twice in to provide huge liquidity to ease market panic temporarily, the crisis is not yet over until astonishing unemployment is reduced and the eurozone economy as a whole starts growing.
This vicious cycle endangers the entirety of Europe, as well as the euro. No one knows the exact losses of the southern European sovereign debts, or the bad assets of the European banks. In consequence, the European banks must raise more capital, not only to meet BASEL III requirements for sheltering them from resurgence of the financial crisis and economic downturn, but also to be able to carry on normal lending for spurring the European economies from lengthened recessions.
Thanks to fatal flaws of the monetary union, i. On the other hand, the European banks are in the course of deleveraging balances and spinning off non-core assets and troubled loans.
Regardless of which estimated figure proves to be more accurate, there will be a big contraction of bank lending in Europe. This trend will have very negative impacts on small and medium-sized firms, which consist of most European companies and create over 70 percent of jobs.
Indeed, an external funding source is needed for Europe to relieve the burden from its troubled banking sector. One of the long-term challenges the world faces is how to feed its rapidly expanding population.
During the period from to the world population has increased from 6 billion to 7 billion and it is projected to reach 8 billion in and 9 billion in On the other hand, the world production of cereal foods including maize, rice and wheat has stagnated at around 2. Thus, the world food stock-to-use ratio has declined from 25 percent in to This is an alert for the world food provisions.
The UNFAO, holding a meeting on the world food security in Rome last October, warned that million people around the world — or one in eight — are starving or undernourished. Food security is also a serious challenge to China. According to the National Statistical Bureau of China, the food production recorded From January to October of , China imported This makes China a big buyer in the world food market, purchasing about half of the global soybean export.
A practical solution is to increase provisions of the food supply worldwide. Indeed, land-abundant countries have high potential to increase their capacity of food production. Over the past decade investors around the world have leased enormous land for farming in Africa, Asia and Latin America. But these commercial activities create two serious concerns that must be addressed for sustainable enlargement of agricultural production in these regions.
The first is how to preserve rights of local residents and their offspring to benefit from commercial farming activities. The second is how to protect environments to avoid predatory development and ecological disasters. To serve the long-term interests of these countries, a new model of inclusive farming development based on equal participation and mutual benefits of all involved parties should be formulated.
Under the circumstance of the global liquidity glut, it is a matter of great urgency for Beijing to divert its assets denominated by hard currencies. To avoid huge losses, a significant portion of the nationalized external savings needs to be decentralized and privatized; rigid mandates of reserve assets enforced by governmental agencies should be replaced by adaptive management exercised by commercial entities; and holdings of vast sovereign debt securities should be diversified to include equity claims against private corporations in commercial industries to create values.
This action will render twofold benefits, the one is to reduce risks that China faces and the other is to facilitate future growth of the world economy.
Providing reforms to adjust monetary policy conduct and lift capital controls, a well-designed financial facility is vital in the procedures of relocating foreign reserves. A structural vehicle called as debt-equity swap DES is an appropriate option to serve this end. Conceptually, it is a special instrument of asset conversion that alters debt requests into equity claims in the process of liability restructuring so as to reduce unbearable obligations or to minimize losses.
To date there exist diverse types of debt-equity swaps, such as Brandy bonds used to address the Latin American debt crisis in the s, Resolution Trust Corporation RTC to solve the U.
Furthermore, a variety of asset conversions are also being employed to deal with the liquidity pinch in the current financial crisis. One example is that last year the Italian government traded state properties with commercial banks for its sovereign debts, and then it leased back the properties from the banks; the latter, in turn, transformed these properties into asset-backed securities ABSs that were used as collateral to borrow money from the ECB.
Another example is the Temporary U. Dollar Swap Arrangement between the U. Fed and the ECB for swapping dollars with euro in the recent years, for the purpose of quietly extending loans denominated by dollars to the European banks.
In this regard, ex ante debt-equity swaps can be created to redeploy a significant portion of the foreign reserves in real business sectors. This special facility includes three steps to execute the asset conversion.
First, the Chinese central bank trades the U. Treasury bonds with investment entities for the yuan. Second, the investors swap the Treasury bonds to equity shares or equivalent claims of targeted companies, or commit them in green-field projects in foreign countries.
Third, the bond-receivers take the U. Treasury bonds as collateral to obtain bank credits or issue asset-backed securities for liquidities. The success of the ex-ante DES facility rests on availability of a variety of market-oriented and highly-professional investment platforms.
As such, it is needed to set up new private investment companies that are featured by mixed joint-share ownership, sound corporate governance structure and adaptability to external environments. Notwithstanding the fact that the would-be asset swap is huge in size, China has enough domestic financial sources to retire significant portion of the foreign reserves. The main source available to be utilized is the bank deposits denominated by home currency.
Thanks to wide financial controls, ordinary Chinese people have little investment choice other than to passively take low-interest bank deposits. The DES facility, thereafter, will provide a channel for the Chinese people to enlarge their portfolios and enhance returns of the wealth. Yet, there have many internal and external obstacles that keep China away from relocating its foreign reserves to global capital-hungry industries. Domestically, there are two main concerns that prevent the authorities from even partially privatizing the foreign reserves and releasing the capital controls.
The first is worry about the avalanche of huge capital outflows caused by widespread corruption activities, which may lead to disastrous economic and social consequences. The second is fear of possible currency attacks from global hedgers and speculators, which may paralyze the fragile financial system.
Indeed, the capital controls cannot check illegal wealth outflows resulting from corruption but good public governance based on transparency, accountability and rule of laws can. On the other hand, potential speculative attacks can be fenced off when relaxation of the capital controls is taken at a progressive and reversible pace, necessary restrictions on short-selling and margin trading of financial assets denominated by local currency are imposed, sound firewalls between different financial institutions are installed, and a comprehensive safeguard system is created.
Some destination countries may fret over large-scaled investment pouring in from China. They may take minority equity shares in invested companies, or accept equity securities with convertible features, buy-back clauses and other initial share-holding options. They may also carry out investments in passive manner and take non-managerial roles through bridging vehicles such as private equity funds, overseas industrial funds, fund of funds and many others.
Besides, they may pursue green-field projects that are faced with less resistance. Ownership structure of the Chinese investors should be diversified. In particular, private investment firms should be encouraged to participate in debt-equity-swaps, and all investors need to increase operational transparency and release accurate information to enhance reliability. In addition, the Chinese may form partnership with other global institutional investors to jointly engage in businesses to reduce concerns of host countries.
Indeed, there are many roadblocks that deter the Chinese investments in the U. On the one hand, the Chinese investors have to face an unfamiliar but much more binding legal and regulatory environment of rules and laws in taxes, employment, environment and intellectual property rights. This may cause operational risks for the Chinese investors. But it also constrains the use of monetary policy for domestic objectives.
There are alternatives such as a low-inflation objective that could work better by delivering more macroeconomic and financial stability. Cate , Robert E. Litan , Michael Staten , and Peter J.
Insurance against currency and banking crises. The Asian Financial Crisis and other emerging market crises have focused attention on the high costs of currency and banking crises. Reserves reduce the likelihood of both types of crises and mitigate their costs if they do occur. Reserve accumulation serves as a mechanism for self-insurance. Self-insurance is costly but may be seen as essential by countries such as China that do not trust international financial institutions to provide adequate insurance without too many strings attached.
Where did the money come from? From to , the current account surplus contributed 91 percent of the accumulation. The goods trade surplus, which is a big component of the current account, is responsible for 64 percent of the accumulation over the whole period.
Capital account surpluses were far more important from to , accounting for 51 percent of overall reserve accumulation. From to , the share of reserve accumulation accounted for by capital account surpluses was only 11 percent. Net foreign direct investment FDI inflows exceeded capital account surpluses from to reflecting the fact that, in the latter half of this period, there was a net outflow of other kinds of capital. Net inward FDI was a major contributor to reserve accumulation from to , accounting for 41 percent of the accumulation.
From to , net FDI accounted for only 26 percent of the accumulation. Most of this was in the first period. Errors and omissions accounted for Valuation effects could be driving some of the short-run dynamics in the reserves data.
Reserves are reported in U. China does not report the currency composition of its foreign exchange reserves, but is believed to hold about 70 to 75 percent in dollar-denominated assets, with assets denominated in euros and yen accounting for most of the remainder. Some of the valuation effects may be picked up in the errors and omissions category of the balance of payments.
In any event, valuation effects are unlikely to have a major role in longer-term trend movements in reserves. Treasury Department. The numbers reported below assume that all U. Treasury bonds and bills : China has steadily increased its holdings of U. Treasuries Table 4. China has recently shifted the maturity structure of its purchases of U. During , short-term bills rather than long-term bonds accounted for nearly two-thirds of net purchases of Treasuries, a far higher proportion than in previous years when purchases of bonds dominated.
China accumulated more agency bonds until July , when it started reducing its holdings of these bonds.
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