Chapter 27 Foreign exchange reserve investment problem

Since 2009, U.S. treasury yields and bond prices have become more and more volatile, and the Obama administration’s huge economic revitalization plan has even reminded the outside world of China’s attitude towards holding the largest U.S. treasury bonds. Foreign reserves are facing increasing challenges.Under such conditions, how to realize the preservation and appreciation of China's foreign exchange reserves? ◎Reporter: Recently, the yields and bond prices of U.S. Treasury bonds have fluctuated significantly. What do you think are the factors affecting the U.S. Treasury bond market? What do you think about the future trend of U.S. Treasury bonds?

Chen Zhiwu: From mid-September to the end of last year, the price of U.S. Treasury bonds rose a lot. This is because investors were affected by the panic of the financial crisis and sought a safe haven for investment.However, as I mentioned in November and December last year, as the U.S. government’s measures to save the economy and financial institutions intensify, the U.S. government will inevitably increase the amount of national debt issued by the U.S. government, and will need to issue an additional 1.5 to 2 trillion U.S. dollars in national debt. , which inevitably means that the price of U.S. Treasury bonds will fall and interest rates will rise in the future.From the beginning of this year to now, the price of U.S. Treasury bonds has generally fallen, and this trend will continue.

◎Reporter: As the largest holder of U.S. Treasury bonds, how does China manage its U.S. bond investment portfolio? Chen Zhiwu: Last year, I advocated that China should reduce the proportion of US treasury bonds it holds, and increase the proportion of equity and resource investment. Looking at it now, this kind of investment portfolio adjustment is even more necessary. First, Obama’s market rescue and economic rescue plan requires the issuance of a large amount of national debt, which is not good for current US Treasury bond holders; second, after the financial crisis at this stage eases, the lending and investment of banks and other financial institutions will definitely To rise, which is what various economic rescue packages are designed to do.At that time, the zero or near-zero interest rate policy of the Federal Reserve and other countries will put inflationary pressure on the economy, which is very bad for investors in US Treasury bonds, and these investors will lose money.

Third, the last few months will be the period when the U.S. stock market has bottomed out, which means that the equity prices of many U.S. multinational companies in the high-tech, financial, and sales industries are very low, the investment value is high, and the opportunities are getting better and better. Thirdly, the prices of oil, natural gas and many mineral resources have been beaten down. Although the global economic crisis will continue to suppress the demand for these resource products in the short term, from a longer-term perspective, it is time to increase holdings A good time for all kinds of resource businesses and resources.

Finally, real estate prices in the United States have fallen a lot, but in most states real estate prices have not yet bottomed out.Although Obama's measures will reduce the downward pressure on housing prices, the adjustment process is not over yet, so now is not the time to invest in US real estate. ◎Reporter: How to fundamentally solve the "dilemma" of my country's foreign exchange reserves, that is, to solve the situation of continuous growth of foreign exchange reserves on the one hand and successive losses in overseas investment on the other hand? Chen Zhiwu: This can be seen from several aspects.First, in the long run, the root of the problem lies in China's economic model that is overly dependent on exports, and the reason why it must be highly dependent on exports is because China's assets and wealth are too concentrated in the hands of the state, and too much income is imported through taxation. In the hands of the government, the relative level of domestic private consumption continues to decline, restraining the growth of domestic demand.The result of the government controlling so much wealth and income use rights is that the production capacity of the Chinese economy continues to expand, which in turn strengthens the dependence of the Chinese economy on exports, leading to a greater foreign trade surplus and foreign exchange reserves, which worsens the foreign exchange reserve dilemma. .

Therefore, the structural reform approach to fundamentally change this dilemma lies in changing the situation of "the country is rich and the people are poor", which includes distributing state-owned assets and equity to ordinary people and reducing various tax rates.With regard to the reform of the private ownership of state-owned assets, we can consider establishing a national equity fund, injecting state-owned assets into it, and then distributing the shares of the fund to 1.3 billion people equally, or by directly giving out shares. These are the things I have been working on since the beginning of last year. What is advocated, because only in this way can China's private consumption be provided with more growing property and income bases. After domestic consumption increases, the export surplus will decrease, and the plight of foreign exchange reserves will also be eased.

Second, in terms of the government's economic assistance structure, China must change its current practice of continuing to focus on infrastructure, large-scale industrial projects, and large-scale industries, because the ultimate result of these measures will still be to continue to improve China's material production capacity and transportation capacity, and strengthen production capacity The dilemma of excess and over-reliance on exports.Measures such as “home appliances going to the countryside” and interest discounts on housing mortgage loans launched in recent months have effectively increased residents’ consumption demand for industrial products and real estate. These measures to stimulate consumption should be the focus of the economic rescue plan.Through these policy adjustments to increase domestic consumption and reduce dependence on exports, this will also ease the pressure on foreign exchange reserves.

Third, further liberalize the space and opportunities for individuals and families to purchase foreign exchange and invest overseas.Many people will say that Chinese individuals have little experience in overseas investment and financial management. This view is good, but there must be a beginning.Moreover, different people have different experiences, preferences, and needs. Now the one-size-fits-all approach to overseas investment and wealth management products restricts those who have the ability and need to choose various types of overseas investment.As a result, those who can help the country share the pressure on foreign exchange reserves and foreign exchange risks are powerless. As a result, the country bears all these risks by itself, which is very unfavorable.

Fourth, encourage more private enterprises to go out and invest, and encourage private enterprises to go out by setting up special funds like the African Development Fund.In the past, some private enterprises were not very successful in going global, but this is understandable and expected.At that time, British multinational companies and American multinational companies also experienced many setbacks, and these tuition fees were always paid.In fact, in recent years, no matter how you look at it, Chinese companies have accumulated a lot of understanding and experience in overseas markets, overseas investment, and overseas economies, and they have made rapid progress. Therefore, I am very optimistic about the long-term development.The Internet and various conferences are greatly reducing the tuition fees that Chinese companies have to pay in the process of going global.

Finally, the operation of CIC should be affirmed.In less than a year and a half, such a good team has been established from scratch, which is not easy.No one wants to see losses, but we should look at CIC's investment performance fairly and objectively.They were established during the subprime mortgage crisis, and the first two investments should have been good choices at the time. At that time, who knew that the subprime mortgage crisis would turn into a full-scale financial crisis in a few months? When making an investment decision, you can only make the best possible decision based on the information you can know at the time. It is difficult for you to make a decision when you have more information in a few months. It is also the best choice. We all know this.Of course, in hindsight, the timing of CIC's founding couldn't have been worse. It entered the biggest global financial crisis since the 1930s!

However, the establishment of CIC is correct. There must be a beginning, and the beginning is always difficult.In the long run, it may be more conducive to development to encounter some setbacks at the beginning.As sovereign funds, their operation is very difficult. All countries are staring at them, and all countries put a lot of political pressure on them. This really brings difficulties to the decision-making process and affects investment performance. ◎Reporter: Premier Wen Jiabao recently proposed that part of the foreign exchange reserves can be used to stimulate the domestic economy.Do you think it is feasible?How to do it? Chen Zhiwu: Technically speaking, because these foreign currencies cannot be bought and sold domestically, the ways in which foreign exchange reserves can be directly used to stimulate the domestic economy are more restricted.These foreign exchange reserves have been used to issue different forms of renminbi liquidity with equivalent value. Therefore, if the country uses these foreign exchange for renminbi in order to stimulate the domestic economy, it is tantamount to transferring the wealth in the hands of ordinary people in a disguised form. The actual depreciation of the RMB wealth in hand will reduce the consumer demand of ordinary people and do a disservice to the domestic economy. That leaves almost only three possible approaches.One is for the state to use the foreign exchange to go abroad to buy infrastructure building materials, workshop equipment, energy and other natural resources, etc., and use these to directly provide national construction projects, thereby reducing the need for the government to finance public projects. Indirectly leave more bank loans and private savings to private enterprises and individual households, and increase financial support for the latter.That is to say, if the current 4 trillion yuan of economic relief expenditure comes from domestic RMB funds, it will inevitably absorb too much social funds, making private enterprises and small and medium-sized enterprises financing even worse; and if the country can use some foreign exchange to import The demand for materials and equipment for these projects will reduce the financing squeeze of the 4 trillion yuan economic stimulus plan on small and medium-sized enterprises. The second method is that for domestic enterprises, especially small and medium-sized enterprises, that need to import equipment, materials, and energy, the state will provide them with low-interest loans in foreign exchange, and these enterprises will repay the loan in RMB or foreign exchange later.In this way, in the situation where SMEs have difficulty in financing, foreign exchange reserves can be circulated domestically in this way without depreciating the RMB, bringing financial support to SMEs and ensuring or increasing domestic employment.Personally, I think this is the best way to use foreign exchange reserves to maintain employment, increase employment, and stimulate the domestic economy. The third method is to distribute foreign exchange reserves to ordinary people and let them go abroad to buy things or travel by themselves. This is Professor Zhang Weiying's suggestion.From the perspective of returning wealth to the people, I certainly agree, because these foreign exchange reserves are actually the result of the realization of Chinese labor, resources, environment, and rights.If this approach is to stimulate the domestic economy, especially domestic consumption, it is necessary to allow other people, companies and banks to purchase foreign exchange from the common people, and then allow the common people to spend domestically in RMB.Otherwise, if ordinary people get foreign exchange, they can only shop abroad. In the short term, this will not stimulate the domestic economy or ensure domestic employment. ◎Reporter: Can the above-mentioned foreign exchange reserves be used to set up corresponding investment funds?What do you think about issues such as scale, capital allocation, and investment industry direction? Chen Zhiwu: With regard to strategic and specific industrial investment, China Development Bank, different large state-owned enterprises and private enterprises are making selective investments in corresponding industries. This layout is also taking shape, and there is no need for the state to establish overseas industries. fund.As for financial investment, China Investment Corporation is capable of this kind of work. They have conducted various professional investment funds overseas, including private equity funds, hedge funds, public equity funds, debt funds, and resource funds. Analytics and due diligence and more.Due to the reasons we mentioned just now, the management has increased the restrictions on new investment of CIC some time ago. However, I think that CIC should be let go now, and they can choose different fund management companies and transfer some of them. Investments are outsourced to fund companies with years of experience.Compared with the prospect of a decline in the U.S. Treasury bond market, the returns of other investment varieties will be better in the medium and long term.