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Forex Reserves Should Be Used to Bolster Pension Fund, Smaller Banks

China should inject part of its huge forex reserves into the national pension fund and part into smaller banks to shore up their financial position, a scholar with a State Council thinktank has said.


"Considering the huge shortfall of funds in the social security fund and the massive payments that will be needed in the future, we should consider injecting an appropriate portion of forex reserves into the pension fund," said Xia Bi, director of the Institute of Finance under the State Council's Development Research Center.


China has already poured billions of dollars of forex reserves into its big state-owned commercial banks. Xia said the same should be done with smaller local banks.


A cash injection will improve these banks' capital adequacy ratios and allow control to be transferred from local governments to the central government, improving risk control, he said.


China's booming exports have pushed its forex reserves higher and higher. By the end of June, the country's forex reserves had soared to US$941.1 billion, the highest in the world.


Managing such huge reserves, which exacerbate pressures for a revaluation of the Renminbi yuan, has increasingly become a challenge to China's financial authorities.


According to Xia, considering the country's floating exchange rate system, its debts, import and export volumes and the size of foreign investment in China, forex reserves of US$700 billion are appropriate.


"In principle, all additional forex reserves can be put to more positive use," he said.


He also suggested encouraging foreign-financed enterprises to list on Chinese stock exchanges, and advising Chinese banks to issue foreign currency loans to these enterprises.


Chinese businesses and organizations should also be encouraged to pay their external debts in advance and discouraged from raising funds on the overseas bond market, Xia said.


China should also use its forex reserves to procure equipment and technologies badly needed in sectors such as education, healthcare, rural infrastructure, energy-saving, workplace safety, sewage treatment and environmental protection, he said.


Before Xia, Chinese scholars have suggested other uses for the country's forex reserves, including buying oil and other mineral resources overseas, importing sophisticated technologies and equipment, and investing in overseas companies, particularly big multinationals.


(Xinhua News Agency September 1, 2006)

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