China should look beyond US Treasuries for ‘real assets’, central bank adviser says

South China Morning Post

China should make better use of the country’s funds by looking to invest its large capital reserves in real assets, not United States Treasury bonds, an adviser to China’s central bank said on Monday.

“We are a low-income country, but we are a high-wealth country ... We should make better use of the capital. Rather than investing in US government debt, it’s better to invest in some real assets,” Fan Gang, director of the National Economic Research Institute and a member of the People’s Bank of China’s Monetary Policy Committee, said.

Fan, speaking at the Boao Forum for Asia in southern Chinese province of Hainan, also said China’s debt load was a serious problem but that it would not lead to a financial crisis for the country because the debt was mostly domestic and China had ample savings.

He said the debt overhang was a result of previous overheating of the economy.

“This problem is serious and we need to clean house. We need to contain this financial risk, but it will not cause a financial crisis,” he said.
China’s rising debt burden has raised concerns that it could eventually trigger a financial crisis, with government officials acknowledging the challenge but vowing to contain the risks.

Fan said China’s savings rate was 44 per cent of GDP, giving it enough of a cushion to deal with the risks, though he added that it would take time for China to stabilise the leverage ratio.

In an interview with Chinese financial magazine Yicai on Sunday, Fan addressed China’s rising trade tensions with the United States, saying the US feels pressure from China’s rise.

Fan said the United States would take measures, which could include a trade war or blocking Chinese investment in the country, to contain China’s rapid development.

On Sunday, a government researcher told the Boao Forum that China was unlikely to sell off its holdings of US Treasury bonds on a large scale as a tactic in its trade dispute with the US.

“On whether China will reduce its foreign exchange reserves, how policymakers think, I don’t know. I personally believe this possibility is very small,” Zhang said.

China held around US$1.17 trillion of Treasuries as of the end of January, making it the largest of America’s foreign creditors and the No 2 overall owner of US government bonds after the US Federal Reserve.

A Chinese vice finance minister said last week that China was a responsible investor of its foreign exchange reserves and that it followed market rules in investing its reserves.

China’s foreign exchange reserves, the world’s largest, rose slightly in March to US$3.143 trillion, central bank data showed on Sunday.

This article appeared in the South China Morning Post print edition as: Forgo US bonds for real assets, bank adviser says.