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December 9, 2011

China To Create $300B Forex Reserves Fund To Invest in Europe and The U.S.

By Central Bank News

The People's Bank of China announced that it plans to create an investment fund to manage $300 billion worth of foreign exchange reserves in more aggressive investments and largely internationally.  According to Reuters the fund would invest in the US via the Hua Mei fund, and Europe via the Hua Ou fund.  It is understood that the fund has been under development for some time, and will seek to invest in real assets and company shares, rather than government securities such as US treasuries.  

The fund will operate alongside the State Administration of Foreign Exchange (SAFE), and separately from China's sovereign wealth fund; China Investment Corp (CIC).  The recent IMF Financial System Stability Assessment provides an overview of China's key financial institutions and structure.

Chart Source:  futureofuschinatrade.com (Added by EconMatters)

The People's Bank of China also made headlines earlier this month when it reduced the RRR by 50 basis points; the PBoC last raised the reserve requirements by 50 basis points in June this year.  Meanwhile the People's Bank of China last raised the benchmark interest rate 25bps to 6.56% in early July this year.  

The Bank for International Settlements recently published a paper on 'China's Evolving Reserve Requirements' which provides an interesting and detailed analysis of the People's Bank of China's use of the required reserve ratio (RRR).

On a related note, the European Central Bank (ECB) cut its Main refinancing operations rate by 25 basis points to 1.00% earlier this month from 1.25%.  ECB governor, Mario Draghi, said:
"The intensified financial market tensions are continuing to dampen economic activity in the euro area and the outlook remains subject to high uncertainty and substantial downside risks. In such an environment, cost, wage and price pressures in the euro area should remain modest over the policy-relevant horizon. At the same time, the underlying pace of monetary expansion remains moderate."

The ECB also announced a series of measures "to support bank lending and money market activity". These measures included longer-term refinancing operations (LTROs), reduction in the reserve ratio to 1% from 2% presently, and increasing collateral availability through reducing the rating threshold for asset-backed securities (ABS), and allowing national central banks to accept bank loans as collateral. Essentially the moves are designed to prevent a freezing up of credit markets and liquidity akin to that seen during the global financial crisis.

Previously the ECB also cut the interest rate by 25 basis points at its November meeting.  The ECB last increased the interest rates by 25 basis points at its July meeting; pausing in May and June, after raising the rate by 25 basis points to 1.25% in April this year.  The Euro Area reported annual HICP inflation of 3% in November and October and September, 2.5% in August and July, 2.7% in June (same as May) and above the Bank's inflation target of maintaining inflation below, but close to, 2% over the medium term.

Euro Area reported quarterly GDP growth in the September quarter of 0.2% (1.4% y/y); the same as the June quarter of 0.2%, following a 0.8% increase in the March quarter, and a 0.3% increase in the December quarter of 2010.  The Euro (EUR) us basically flat against the US dollar so far this year, while the EURUSD exchange rate last traded around 1.34.

About The AuthorCentral Bank News is dedicated to provide timely, and comprehensive global central banks news and policy developments (EconMatters author archive here.)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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