Forex profit in China predicted

10:50, July 07, 2010      

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The top currency agency that manages China's US$2.5 trillion in foreign reserves said Tuesday it made a profit last year despite the global crisis and expressed confidence it will profit in the future.

China's foreign exchange reserves made a "relatively good profit" in 2008 and 2009, the worst two years of the crisis, the State Administration of Foreign Exchange said in a statement, but it didn't give specific figures.

"We are confident that our foreign reserve can achieve long-term stable and good returns," it said.

The top foreign exchange regulator tried to defuse concern about the impact of financial turmoil at Fannie Mae and Freddie Mac, saying it does not own shares in the troubled US mortgage giants and their bond repayments are normal.

The US Federal Housing Finance Agency, which took control of Fannie and Freddie in September 2008, last month directed the two government-sponsored mortgage purchasers to de-list their shares from the New York Stock Exchange. The de-listing of the two US agencies' stocks hasn't affected the value of their bonds, which are popular among central bank reserves managers.

China will continue to closely monitor the development of the two companies to ensure the safety of China's foreign exchange assets, the currency agency said, quoting "safety, liquidity and added value" as the main principle.

The agency also said it ought to make a profit even if China's currency, the yuan, rises against the dollar.

It said gains on yuan-denominated assets should be bigger than losses on dollar-denominated assets in yuan terms.

China announced in June it would allow more exchange rate flexibility, which is expected to lead the yuan to gradually rise against the dollar.

The bulk of Chinese reserves are invested in US Treasury debt and other safe but low-yielding assets, but China launched a sovereign wealth fund in 2007 to earn a better return on a portion of its holdings.

China will stick to its diversification policy on its forex stockpile, the regulator reiterated.

A big depreciation of the US dollar wouldn't necessarily mean that China's forex reserves will be severely hit, it said.

The forex authority said any currency conversion loss is realized when the exchange transaction is made. Before that it's only a paper loss.

China won't exchange huge amounts of forex into the local currency in general. That's why no big real losses will occur. "Even though the greenback lost value, other currencies like the euros may appreciate and then counter-fight the depreciation of the US dollar," it said.



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