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Zhang Bin: The Principal of China's US Dollar Investment Under Threat

CONTROLLING the appreciation of the RMB brings benefits to the US economy, but it brings disadvantages to the Chinese economy at the same time, says Zhang Bin, deputy director of the International Finance Research Center, Institute of World Economics and Politics at the Chinese Academy of Social Sciences. Zhang says China should cut its holdings of US bonds on the basis of reducing foreign exchange surplus. Whether it is in terms of purchasing power or financing, the investment yield of Chinas foreign exchange reserves is not optimistic. Since the sub-prime loan crisis developed in the US, the principal of Chinas US dollar investment has been under threat. “Some impacts are yet to be felt on Chinas financial market and in its export industries, so the weakening US economy will continue to affect the local economy.”

Lu Jing: Crisis Comes with Opportunities

Lu Jing, former senior bank examiner with the Federal Reserve Bank of New York, holds that the financial crisis is spreading all over the world. China faces a potential threat because of its large foreign exchange reserves. In such an uncertain financial situation, it is not advisable to inject capital into financial markets. “More American banks are teetering on the brink of bankruptcy, so are insurance companies and funds (monetary funds, hedge funds and privately offered funds). And most financial institutions lack transparency,” claims Lu Jing. From a long-term perspective, Lu advises, we still need to be mindful of risks in exchange rates and interest rates of the US dollar. Do not put all your eggs into one basket. Try to decentralize investments. Investing in the tangible economy, in areas like real estate, is a good way to moderate the effects of the downturn in the US economy. Meanwhile, some technical industries, which were off limits to China in the past, may open the door and utilize Chinese capital. “Crisis comes with opportunities, and China could create a better investment environment by taking this opportunity,” says Lu Jing.

Guo Tianyong: Chinas Economy Faces Challenges

ONLY if the US government resumes its “strong dollar” policy and shrinks its deficit can the security of Chinas enormous holdings of US bonds be guaranteed, claims Professor Guo Tianyong from the School of Finance at the Central University of Finance and Economics. At present, the domestic economy is facing some difficulties, with the bankruptcy of a large number of small and medium-sized export-oriented enterprises and the slowdown of profit growth in large and medium-sized industrial companies. Moreover, the international situation is deteriorating rapidly. Under these circumstances, China should hold enough foreign exchange reserves to deal with potential capital outflow, such as has occurred in the ROK and Russia.

He Jun: China Has a Lot of Domestic Issues to Deal with

He Jun, an analyst with the Anbound Group, commented that Chinas enormous holdings of US bonds are in danger, and the continual injecting of funds into the US economy should be stopped. “China is not capable of helping the US. We have a lot of domestic issues to deal with, such as social security, medical insurance, education and issues concerning agriculture, the countryside and farmers. Never overrate our own abilities.” Capital outflow has impacted considerably on China, as many foreign companies have withdrawn capital from China to keep their balance sheets steady.