China to use forex reserves for commercial loans

China has set up an office to handle trusted loans of foreign exchange reserves.

This allows the country's US$3.31 trillion of forex reserves to 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.

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

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.

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