China Plans More Uses for Its Forex Reserves

China will aim to expand the use of its US$1.07 trillion in foreign exchange reserves, the world's biggest stockpile, Premier Wen Jiabao told a strategic conference of top policy makers that ended Saturday.

Wen said the imbalance in China's external payments was worsening and the country still faced numerous financial risks, according to an account of his remarks posted on the central government's Web site.

Markets have been eagerly awaiting the outcome of the central financial work conference, held every five years, for details of any plans to set up a separate agency to manage part of China's foreign exchange reserves.

In the event, Wen confined himself to generalities. He said China would take "comprehensive measures" to attain balance in its external payments while "actively exploring and expanding channels and modes for the use of foreign exchange reserves".

A Long To-Do List

Wen outlined other priorities, including:

  • deepening the overhaul of state-owned banks and pushing further reform of the shareholding structure of Agricultural Bank of China, the only big bank still awaiting a government bailout.
  • reforming China's three policy banks so they lend along market lines rather than in support of government policies. China Development Bank will be the first to become commercialized and will focus mainly on medium- and long-term business.
  • making it easier, as part of rural financial reform, to open bank
    branches in the countryside.
  • beefing up capital market and insurance sector reform, in part by increasing the volume of corporate bond issuance. Wen was silent on whether oversight of the corporate bond market would pass to the securities regulator from the National Development and Reform Commission planning agency.
  • keeping money supply and credit growth in check, as well as improving the credit structure, to support steady and fairly rapid economic growth.
  • promoting market-oriented interest rate reform and further improving the yuan's exchange rate mechanism.
  • further opening up China's financial sector and capital markets in an environment of fair competition.
  • improving China's regulatory supervision capability to safeguard financial stability, including checks on short-term cross-border flows of speculative capital and actions against money-laundering.

The first two financial work conferences ushered in far-reaching policy changes. The first, in 1997, led to the creation of asset management companies to take over 1.4 billion trillion yuan in bad loans from the big banks as the first step on the road to stock market listings.

The second, in 2002, led to the of the big banks and the establishment of the China Regulatory Banking Commission. "There are still many conflicts and problems in the financial sector -- an unhealthy financial system, an unreasonable financial structure, imperfect
financial corporate governance and operations, a worsening balance of payments imbalance and many potential financial risks. All this demands our closest attention and warrants effective resolution," Wen said.

A notable absentee from the list of policy makers who attended the two-day meeting was Huang Ju, the member of the nine-member standing committee of the ruling Communist Party's politburo who oversees economic and financial policy.