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How best China can fend off financial risks

By Yi Xianrong (China Daily)
Updated: 2008-10-16 17:06

The Wall Street has experienced a once-in-a-century financial turbulence over the past weeks, with a number of old financial bodies falling apart. To defuse the possible catastrophic aftermaths of the unprecedented financial crisis since the Great Depression (1929-33), the Bush administration rushed to take an array of rescue measures and tried to get them through the Congress for their implementation.

Almost all the world's players have been affected by the crisis and braced themselves for possible challenges ahead. Whatever effects these emergency measures will possibly bear, the ongoing US mortgage debts-induced financial crisis is expected to produce an inestimable influence upon the US financial market and the world's economy as a whole.

Take China. The Asian nation's huge investment in the US, both its dollar-holding foreign reserves and a lot of US equity products bought by its domestic financial bodies, are now at the risk of wealth losses.

Under these circumstances, the Chinese government faces the most severe problem ever on how to pursue effective ways to fend off such kinds of financial risks for its huge amounts of investment in foreign countries, in particular its colossal foreign reserve investment.

Although the rescue plans adopted by the Bush administration and other governments have led to an unprecedented bounce-back in the world's sliding stock markets, the adverse effects of the infectious financial crisis are yet to unfold. Thus, China's overseas investment in the financial field is expected to face an increasing, not a decreasing, risk.

Some propose the country shift its enormous foreign reserve investment to Europe to evade possible financial risks caused by its concentration in the US. But the problem is to decide in which areas the country can invest in the European markets and whether the European Continent can remain immune to the latest financial sandstorm that first broke out in the world's most powerful country and then quickly spread to other regions.

Considering the current financial investment risks overseas, the best destination for China's enormous foreign reserves should be Hong Kong's H-share market. A large number of stocks in the H-share market, after experiencing the latest round of miserable price decline, now has no space for a further drop. Take China Southern, China Eastern, and China Aluminum as examples. All the shares of these Hong Kong-listed Central enterprises now lie in on a reasonable price position after suffering a drastic fall over the past months. The deep dive of their indices has not only dealt a severe blow to the confidence of overseas investors on the H-share market, but has also caused these enterprises to further lose their financing functions.

If the central government uses its huge foreign reserve resources to buy these enterprises' stocks, investors' dented confidence in them would be greatly boosted, which would also retrieve their affected financing functions. As leading enterprises in relevant domestic industries, these listed central enterprises have long served as the backbone and pillar of the national economy.

Not only listed in Hong Kong, these enterprises are also listed in Shanghai's A-share bourse and act as the market's weighted shares. The flow of a portion of the country's foreign reserves to H-shares is expected to restore confidence in the whole domestic stock market if it performs well in Hong Kong.

In addition, the foreign reserve investment in the H-shares will also help investors regain confidence in Hong Kong's stock market.

Over the past year, the stock market in the Special Administrative Region has also experienced large fluctuations. Recently Hong Kong's Hang Seng index plummeted under 16,000 points from last year's highest 31,000. Given that domestic H-shares play an influential role in Hong Kong's stock market, the flow of the country's foreign reserves to H-shares will help investors regain confidence in Hang Seng's H-shares.

These are only part of the benefits to be brought by the flow of the country's foreign reserves to H-shares. In the context of global financial turbulence, Hong Kong's stock will be the safest harbor for the ever-increasing foreign reserves, given that we have a better knowledge about the market compared with other risky or uncertain foreign stocks.

In view of potential risks, the purchase of a large amount of stocks of the Hong Kong-listed central enterprises also means purchasing into the future of the country's economic development. Given its large scale, the flow of foreign reserve to H-shares is not expected to cause excessive speculation under the current, well-run market monitoring system in Hong Kong.

The author is a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences