UPDATE 1-China’s FX reserve managers defend their record

* China’s FX reserve managers seek to disarm critics

* Big losses avoided during global crisis

* Europe to remain key investment target

BEIJING, July 6 (BestGrowthStock) – The managers of China’s hoard of
currency reserves defended their investment record on Tuesday,
saying they had avoided big losses during the global crisis and
voicing confidence they could achieve stable long-term returns.

The State Administration of Foreign Exchange is an easy
target for domestic critics who question why China has amassed
$2.45 trillion in reserves and invested the money largely in U.S.
and European bonds instead of spending it at home.

In a detailed statement apparently aimed at deflecting such
criticism, SAFE said it had realised “relatively good returns” in
2008 and 2009 when the international financial crisis was raging.

“In any specific year, the investment return on our foreign
exchange reserves may not be very high, but we are confident of
achieving good, stable returns in the long term,” it said.

Worries this year have centred on Europe after Greece’s
failure to roll over its bonds prompted euro zone governments and
the IMF to sling a safety net under the entire bloc in case of a
fresh market emergency.

SAFE said the measures had worked so far in staving off debt
defaults or restructuring and Europe would remain a key
investment market for China’s reserve managers.

“We believe Europe, with the joint efforts of the
international community, will overcome its difficulties and
maintain financial market stability and healthy development,”
SAFE said.

The agency’s statement was the second in a series setting out
how it works. Last week SAFE explained to the public why the
reserves, built up by selling yuan to hold down the currency’s
value, cannot be spent freely inside China. [ID:nTOE661065]

One of the prime concerns of Internet commentators is the
long-run health of the dollar. If the U.S. currency weakens,
SAFE’s vast holdings of U.S. securities, mainly bonds, will be
worth less when translated back into yuan.

Bankers assume that perhaps two-thirds of China’s reserves,
by far the world’s largest stockpile, is parked in dollar assets,
although the currency composition is a state secret.

But SAFE explained that any currency translation losses are
only on paper and would not be realised unless the central bank
were to sell its reserves — something that it said was
impossible to imagine unless there was a war or a huge crisis.

What’s more, if the yuan appreciates, currency translation
losses will be outweighed by book gains from rising asset prices,
the agency said on its website, www.safe.gov.cn.

SAFE also took head-on worries voiced in Internet forums
about China’s investments in the U.S. mortgage financing agencies
Fannie Mae and Freddie Mac.

Washington had to make good on its implicit backing for the
two government-sponsored entities during the sub-prime debt
crisis by bailing them out.

SAFE had not bought shares of Fannie and Freddie, and the
delisting of the agencies’ shares had not affected the value of
their bonds, which are a favourite with central bank reserve
managers.

“At present, principal and interest payments on Fannie and
Freddie bonds are normal, and the prices of the bonds are stable.

“We will continue to closely follow relevant developments at
Fannie and Freddie to ensure the safety of our foreign exchange
reserve assets,” the statement said.
(Reporting by Zhou Xin and Simon Rabinovitch; Writing by Alan
Wheatley; Editing by Jonathan Hopfner)

UPDATE 1-China’s FX reserve managers defend their record