China's Foreign Exchange Reserves Of The Commodity Asset Allocation Study

Due to the surplus of trade account and capital account, in recent years, the foreign exchange reserves of China grow rapidly. In first half of 2009 it has been up to 2 trillion U.S. dollars. Around the world by the U.S. subprime crisis, liquidity contraction, the economic downturn, China's huge foreign exchange reserves showed a strong competitiveness, and attracted the world's attention.However, there is huge cost for holding foreign exchange reserves. Such as converting the foreign currency to domestic currency will cause inflationary pressures, monetary policy independence will be affected, and it will face the exchange rate risk, and even more, it will also form a "Dusty Gerlitz cycle "and so on. Overseas financial markets have shown sharp fluctuations in the year of 2007-2008, it brought great challenges to foreign exchange management for the Chinese authorities. Investing U.S. Treasury bond, Fannie Mae bond and Freddie mac bond has made China into a passive situation and the facts of U.S. dollar devaluation reinforce the urgency of foreign exchange investment management. How to improve the efficiency and the value of the funds has been very important.On the other hand, with the industrialization and urbanization speeds up, China has become very powerful for the consumption of copper, aluminum, oil and other minerals. While the limited mineral resources of China makes the contradiction between supply and demand increasingly prominent. This "Chinese factor" has become an international object in the futures market for speculators; it brings numerous Millionaires because of commodity assets allocaiton. To this end, China has paid a high price. The resources such as steel and other non-futures species has been controlled by a few big international groups. China was in the dry tree in the price negotiation. The establishment of reserves of mineral resources in "Eleventh Five-Years," the establishment of strategic oil reserves before, and the revitalization for non-ferrous mineral resources industry recently all indicate the importance of commodity resouces for the development for China. So, how to insure the security of strategic resources has become a more prominent issue. The first problem reflects the limitations of invsting objectives for foreign exchange reserves, and the latter indicate that we does not establish a strategic resource security system which can hedge the risk of resource prices. Connecting the two issues together mentioned previously, using some asset allocation methods and investement tools in financial engineering, and then though international balance sheet analysis, input-output analysis and empirical analysis we presents a stratetry idea that is commodiy asset allocation based on industrial demand for foreign exchange reserves.The main work and innovations reflected as bellow. First, it is breakthrough for foreign exchange reserves investment. We put resource commodity assets into asset pools for foreign exchange reserves. So income is not the only object for foreign exchange reserves management, the industry development demand for resource commodities is another important one. Widening investment channels, diversifying investments to spread risk, and reducing the risk of commodity assets price, all we need to do. We do, so we can improve the efficiency in the use of foreign exchange reserves and get commodity asset returns and ensure the demand of commodities for industry development.Secondly, how to incoporate the economic development strategy into asset allocation and fufill the state's long-term demands is a key thesis in this paper. Through input-output analysis, we found the price shock is key factors for measuring industry development demands for resources; it is relate to the security and sustainability of commodity resources. So the key object is to reduce the price risk of commodity resources for foreign exchange reserve mangement. On the basis of the analysis before, not taking into account investment income of foreign exchange reserves, with the objective of reducing the price shock, this paper uses two types of assets-stock and futures portfolio to hedge the import of resource commodities prices. This method not only broke through the traditional restrictions that is simply using futures to hedge for physical commodities, establishing a price fluctuations immune system, and also making hedging more efficient. Commodity futures, physical commodities and equity investments are well unified, rather than invest isolatedly.Thirdly, we construct a commodity price index which reflects Chinese resources demand and supply characteristics and a hedging-mean variance model. Through analyzing the various factors relate to asset allocation, mainly including investors, investment objectives and investment targets, so we know the asset allocation objectives, constraints, and utility function clearly, thereby preparing the conditions for the optimization modeling. Through econometric analysis and input-output analysis, it gives two objectives which are the optimalizing the investment income for foreign exchange reserves, and reduce volatility for the import prices for commodity resources, and three constraints for risk management:liquidity, safety, asset availability. According to this study we found that the model can hedge the import prices for commodities, at the same time, to foreign exchange reserves it can supuss the opportunity cost that foreign exchange reserves faces.Fouthly, according to the assets predictable theory, considering the impact of commodity futures, it gives dynamic adjustment for the configuration realized before. It found that the "Chinese factors" has impact to international commodity price; especially China's money policy can be the signals for international commodity allocation. At last we incorprate this signals into the model of Bayesian asset allocation, it can get benefits for this.The main conclusion of this study is that commodity asset allocation based on the industrial demand for foreign exchange reserves can be realized. Through the idea give in this paper, we not only could avoid the risk of the dollar, ensure the decentralization investment risk of foreign exchange reserves, but also could reduce the price risk of imports commodities and ensure the safety of resource demand and sustainability for industry. In the process of commodity asset allocation if you could consider the influence of "Chinese elements", you can obtain better returns which are often beyond traditional securities investment.As all, this paper presents a stratetry idea that is commodity asset allocation based on industry demands for foreign exchange reseaves. It not only considers the demand for investment income for foreign exchange reserves, but also incorporates the demands for commodity resources for industrial development. From the view for enhancement of national welfare and insure the security recouces for the industry, it establishes a system that can hedge the import price risk of resources.