China turns to global 'real assets'

THE record US$94 billion fall in China's foreign exchange reserves in August - a larger amount than the official currency holdings of the UK or Canada - has commanded international headlines. However, amid signs that Beijing is accelerating its build-up of foreign "real assets" in quoted and non-quoted equities, infrastructure and real estate, the People's Bank of China's official reserves are becoming a less important guide to the overall value of China's wealth held abroad.

China sold some of its official dollar and euro holdings to support the renminbi during a volatile month for the China currency marked by a loosening of its peg to the US dollar - a long-trailed move to make the renminbi more responsive to market forces. This took China's official currency reserves to US$3.6 trillion, down US$400 billion from their peak of June 2014.

Volatility on Chinese stock markets is contributing to flows of funds out of the country. Yet this is part of a generally healthy rebalancing of China's net foreign assets. Foreign equity holdings by private and public sector companies are progressively taking over a larger share of China's overall net foreign asset position, estimated at US$1.8 trillion at the end of last year, making it the world's second largest net foreign creditor (behind Japan and ahead of Germany).