Tag Archives: State Administration of Foreign Exchange

China tightens clampdown on fake trade invoicing

HOT MONEY COMING into China in pursuit of rising property prices and in expectation of further yuan appreciation has long concerned authorities for fear it will help inflate bubbles. Periodic efforts are made to clampdown on those speculators skirting the rules for legitimate foreign exchange transactions. In the latest one, the State Administration of Foreign Exchange (SAFE) says it is looking into trade financing to ensure there is real trade behind the foreign exchange being requested.

In July, it was revealed that some Chinese export companies were in effect disguising hot money as trade payments, writing up fake invoices so they could skirt capital controls and make a fast buck speculating on the yuan’s rise. This was going on on a sufficient scale to be affecting the official trade figures.

SAFE cracked down on those, warning trading houses that were cooking their books to get them in order in short order. But it is clear the chicanery, or something like it, is continuing. SAFE lambasted the commercial banks for not being sufficiently vigilant in rooting out the practice among their customers, saying it would now carry out its own assessments. State media says penalties for abuses will be increased — and imposed on both the companies and their bankers.

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China’s Qualified Success In Attracting Qualified Foreign Investors

The raising of the $1 billion ceiling on holdings in China’s domestic stock market by foreign sovereign wealth funds, central banks and governments is a typically small and incremental move. It is another piece in the 10,000-part jigsaw puzzle that is China’s financial reform. Perhaps not the most important piece, but a piece nonetheless.

The original idea of the Qualified Foreign Institutional Investor (QFII) program was to boost confidence in the domestic stock market, which has more than halved since its peak of November 2007, by opening it up via QFII investment funds to a small group of rich but friendly, long-term investors, such as Qatar’s sovereign wealth fund, Qatar Holdings, and the Hong Kong Monetary Authority. But not that much money had flowed in, $36 billion of the $80 billion initially authorized.

That is less than 1% of the market’s total capitalization. Investors haven’t been overjoyed by the funds’ performance, tax uncertainty and high fees. Lifting the $1 billion ceiling for an institutions holding is an encouragement to the willing to take up more of the $80 billion quota, which is not being changed under the new regulations. Nor has the State Administration of Foreign Exchange (SAFE), which promulgated them, said what the new upper limits will be, just that each application will be considered on its individual merits.

In addition, China may also relax a rule that requires yuan-denominated QFII funds to be invested 80% in bonds. What remains to be seen is whether the authorities will press ahead with proposed tax changes to lessen the favorable tax treatment QFIIs get compared to domestic investors. There isn’t much evidence to suggest that China’s stock market is sufficiently attractive to foreign investors to support increasing the tax take from them while still having them expand the amounts they are prepared to invest.

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China Cuts Its Holdings Of U.S. Treasuries–Or Not So Much

China cut its net holdings of U.S. Treasuries by 12% in the second half of last year, more than twice as much as previously reported, according to the preliminary annual revision of the U.S.’s monthly Treasury International Capital (TIC) report. And it probably doesn’t mean anything much beyond what we already know.

The new TIC report on major foreign holders of U.S. Treasury securities shows that China’s holdings fell from $1.31 trillion last July to $1.15 trillion in December, with a sharp net sell-off coming in that last month. The TIC monthly numbers had shown a fall from$1.17 trillion to $1.1 trillion over the same period. The annual revisions are considered more accurate than the monthly numbers. They take into account the true origin of buying done through third countries. A new series of monthly numbers introduced in January this year will narrow the accuracy gap, though not close it. (U.S. Treasury note on all this here.)

China buys a lot of U.S. Treasuries through London, and, to a lesser extent other popular custodial centers such as Luxembourg, Belgium, Switzerland and the Caribbean. Once this is taken into consideration, the preliminary June baseline number for its holdings increased to $1.31 trillion from $1.17 trillion. Hence the doubling of the percentage net sell-off in the second half of last year.

A year-on-year comparison paints a different picture: China’s holdings at $1.15 in December 2011 were down less than 1% from $1.16 trillion a year earlier, and might have been higher had there not been a heavy sell off in December last year from November’s holdings of $1.25 trillion. China typically reduces its Treasuries holdings towards the end of a year.

The numbers for the second half of last year were always likely to be closely watched. The political kerfuffle in Washington over the debt ceiling during the autumn put the U.S.’s AAA-credit rating at risk. Also, overseas investors generally were buying higher-yielding U.S. mortgage securities ahead of what was expected to be a further round of quantitative easing by the U.S. Federal Reserve.

There are other factors consistent with a long-term fall in China’s Treasuries holdings, among them a shrinking trade surplus and the gradual rise in the yuan against the dollar. This time round, Beijing has also likely been buying euro-denominated sovereign debt, both to diversify it holdings further (which it has been doing for some time) at fire-sale prices, and to provide some political backstopping for Europe during the euro-debt crisis. The State Administration of Foreign Exchange (SAFE), which manages the country’s foreign exchange reserves, is also pursuing equity investment and a little buying of gold and more of other commodities. When you are sitting on $3.2 trillion in reserves, you have to chase a little yield. The Wall Street Journal calculates that the share of China’s reserves in U.S. securities has fallen to a decade-low 54%.

While SAFE  hasn’t been putting all the extra foreign-exchange reserves that China has been taking in into U.S. dollar denominated assets for a while, more recently, the U.S. Federal Reserve has been buying long-term Treasury bonds as part of its easing program, Operation Twist, as the putative QE3 became. Americans who bleated about their country being in hock to the Chinese, can now bleat about being in hock to their own Federal Reserve–for some an even greater evil. For the rest, China still owns more than $1 trillion of American sovereign debt to get het up about. Nor does China have too many other places to put it.

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Safely Buying British

China not only has a taste for British cars; it likes its companies, too. The Economist reveals that China’s sovereign wealth fund has sprinkled a little of its largesse around a lot of Britain’s biggest companies. The State Administration of Foreign Exchange (SAFE), which manages the country’s foreign reserves, has put £13.8 billion (147 billion yuan/$22.3 billion) of its estimated at $350 billion investment fund into 63 of the companies that make up the FTSE 100 index.

Holdings vary in size from 0.18% in the Royal Bank of Scotland to 1.63% in ARM Holdings, a technology firm. (A full list of the fund’s disclosed holdings can be found here.)  Its biggest investment by value is in Royal Dutch Shell; energy and basic materials are the two sectors that attract most of its cash.

Where else in the West is it similarly sprinkling, we wonder?

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China Puts A Number On Hot-Money Inflows, And It’s Small

China’s policymakers have long pointed an accusatory finger at the impact of hot-money inflows on inflation and asset bubbles. To what extent that is true has been difficult to assess. Quantifying such speculative investment inflows is tricky. In essence, analysts look for foreign-exchange reserves not explained by traditional transactions such as trade and foreign direct investment.

The State Administration of Foreign Exchange (SAFE) has taken a stab. The numbers it comes up with are $75.5 billion for 2010, and, after netting out cross-border yuan settlement, $35.5 billion, which is equivalent to 7.6% of the year’s total increase in foreign-exchange reserves. By way of comparison, SAFE reckons, total hot-money inflows in 2009 were $29.1 billion and averaged $25 billion a year over the previous decade, accounting for the equivalent of 9% of annual foreign-exchange reserve increases on average. (The is no netting out number as cross-border yuan settlement is recent.)

The numbers suggest that hot-money inflows account for a relatively small part of capital inflows, and are but a spec compared to the size of the economy as a whole. They took a large leap last year and any extra irritant to inflation is unwelcome to policymakers struggling to drain the excess liquidity from the economy in a controlled and orderly way. They also suggest that China is having increasing difficulty in maintaining effective foreign-exchange controls.

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Beijing Tries To Close Hot Money Loopholes

New rules on individual’s foreign currency transfers have been announced. The State Administration of Foreign Exchange says any person or organization outside China cannot send foreign currency to more than four Chinese individuals on a single day or consecutive days. Receiving foreign exchange from more than four people considered to be near kin. The new rules are intended to close loopholes that let individuals bypass the limit of $20,000 on the amount of foreign exchange residents can buy by using the accounts of relatives and friends. The hope is that it will help cut the flow of hot money coming into the country in pursuit of rising property prices and in expectation of a yuan appreciation. With domestic liquidity already high, the hot money is just helping inflate bubbles. Will the new rules work? This Bystander guesses not. Residents have proved adept when one hot-money loophole closes at opening another.

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China Becomes A Gold Bug

China says it is now the world’s fifth largest holder of gold. Hu Xiaolian, head of the State Administration of Foreign Exchange, told Xinhua that China’s gold reserves stood at 1,054 tonnes at the end of 2008. That is up by 454 tonnes from the last time the country made the size of its gold holdings public five years ago. China, which is the world’s largest gold producer, is now owns more gold than Switzerland and is one of only six countries to hold more than 1,000 tonnes of the metal.

Hu’s announcement is further evidence of Beijing’s diversification of its foreign exchange reserves away from dollar-denominated assets, though to keep things in perspective, the gold holdings are worth $31 billion at current prices, versus foreign exchange reserves of  nearly $2 trillion, and the U.S., the world’s largest holder of gold has 8,134 tonnes, according to the World Gold Council.

The question for investors is whether Beijing plans to buy more and, if so, how much. Intriguingly, the IMF has a 400-tonne holding it has indicated it wants to sell.


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SAFE, Not So Much

Prime Minister Wen Jiabao is worried about China’ s investments in the U.S. The U.S. has said there is nothing to be worried about. All very nice but the FT is reporting why China feels it has a  bloody nose from its U. S. investments. China, via the State Administration of Foreign Exchange. SAFE has lost tens of billions of dollars of its foreign exchange reserves through a poorly timed diversification into global equities just before world markets collapsed last year, Jamil Anderlini writes.

SAFE doesn’t disclose its holdings except to the party’s leadership so it is impossible to know exactly how much it has lost from diversifying before markets crashed. But assuming that SAFE had $160 billion worth of overseas equities, losses on those investments would exceed $80 billion. The FT draws on Brad Setser, an economist at the Council on Foreign Relations in New York, for its numbers. He reckons SAFE has stakes in companies including Rio Tinto, Royal Dutch Shell, BP, Barclays, Tesco and RBS, though the bulk of its holdings remain in U.S. Treasury bills,

The circle is closing.

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