Office established to handle forex reserve loans

China's foreign exchange regulator on Monday announced that it has set up an office to handle trusted loans of the country's foreign exchange reserves.

The creation of the office means the nation's 3.31 trillion U.S. dollars of forex reserves can be officially loaned to domestic enterprises as commercial loans to support their overseas business expansion.

The office, named SAFE Co-Financing, will be important for creating new, innovative ways to use foreign exchange reserves that will prevent the funds from decreasing in value, according to the State Administration of Foreign Exchange (SAFE).

According to a SAFE statement, it has already issued some trusted loans from the forex reserves.

"It provides a sound foundation and environment for domestic financial institutions and forex market entities to expand their businesses and trade overseas," the statement said.

It also expands the investment scope of forex reserves and further diversifies the management of them. Meanwhile, it prioritizes risk prevention and safeguards the assets against value contraction, it said.

SAFE said the new body will operate based on market principals by respecting industry rules and market choices to promote fair play.

It did not provide details of how it will run.

China has accumulated the world's largest holding of foreign exchange reserves on the back of trade booms and cash inflows.

While the massive stockpile plays its role in meeting the country's demand for foreign exchange, it also faces increasing risks of devaluation amid the yuan's rising exchange rates against major foreign currencies.

China's forex reserves were mainly invested in the treasury bonds and financial debts of a few countries. The quantitative easing monetary policies implemented by the developed economies, however, have squeezed the reserves' profit margins in recent years, said Zhao Qingming, an economist with China Construction Bank.

As Chinese enterprises purchase assets abroad more frequently, their needs for foreign exchange also increase. Making trusted loans from the forex reserves could not only help those enterprises, but also increase the reserves' investment margins, he noted.

Compared with treasury bond investments, trusted loans certainly have higher risks. But opening up a new mode of investment is essentially a means to diversify risks, said Zhang Bin, a researcher with the Chinese Academy of Social Sciences.

At the SAFE's annual work meeting held last week, it said better management of the forex reserves will be a major task this year.

To expand the use of its hefty reserves, the country set up the China Investment Corporation (CIC), the nation's sovereign wealth fund, in September 2007 with registered capital of 200 billion U.S. dollars.

It has invested in commercial and infrastructure projects such as Heathrow Airport Holdings in Britain.