A Different Type of Trade/Exchange

If you ever wonder how the Chinese government uses the gigantic foreign reserve it built up through foreign trade, the following article by Andrew Batson from the WSJ might interests you. This is a very different type of foreign trade or foreign exchange than the ones we used to know, and it seems China is also getting better and better at this (like at everything else). 

URL for this article:
http://online.wsj.com/article/SB122121919505927749.html

If you want to see for yourself, the goods are at: http://www.rree.go.cr

 

China Used Foreign-Exchange Reserves In Diplomatic Deal with Costa Rica

By ANDREW BATSON
September 12, 2008 7:54 a.m.

BEIJING – China secretly agreed to use its foreign-exchange reserves to buy $300 million in bonds from Costa Rica as part of a deal that enticed the Latin American nation to switch diplomatic recognition to Beijing away from Taiwan, newly-published government documents show.

The documents provide rare evidence that China has used its $1.81 trillion in official reserves, the world's largest such store, for explicitly political purposes as well as financial ones. The documents describing the deal were released by the Costa Rican government on an official Web site this past week after a court challenge by local newspaper La Nación, which published accounts of their contents. According to the documents, China's State Administration of Foreign Exchange in January purchased $150 million of the U.S. dollar bonds, which pay 2% annual interest, and will purchase another $150 million in January 2009.

The politically-driven investment by SAFE, as the foreign-exchange agency is known, could lead to a backlash just as it becomes an increasingly active player in international stock markets. It could also undercut efforts by the China Investment Corp., a sovereign investment fund that is run separately from SAFE, to be welcomed as a global investor that pursues only financial returns.

The negotiations that led to the Costa Rica purchase are part of a long tradition of "checkbook diplomacy" practiced by diplomatic rivals China and Taiwan. China considers self-governed Taiwan part of its territory and demands that its diplomatic partners sever official ties with the island.

Most of the handful of countries that keep diplomatic ties with Taiwan are poor developing nations to which it gives aid. But China's growing economic might has in recent years allowed it to outmaneuver Taiwan and convince many countries to change their ties. Costa Rica switched its diplomatic recognition to Beijing in June 2007. The impoverished African nation of Malawi followed in December.

Costa Rican Vice President Laura Chinchilla has defended the deal with China, saying "We believe the country received only positive news with the establishment of this relationship," according to a statement by her foreign ministry on Wednesday. She noted China's commercial promise and its support for Costa Rica in international forums like the United Nations.

On its Web site, Costa Rica's foreign ministry published copies of an agreement between the two governments that was signed in Beijing on June 1, 2007, as well as several subsequent letters. China is to give Costa Rica another $130 million in direct economic aid that will not be repaid, in addition to the two-stage bond purchase.

In a statement Friday, China's foreign ministry did not contest the validity of the Costa Rican documents. "China provides assistance to the Costa Rican government within its means. The goal is to help Costa Rica's economic and social development," the statement said.

SAFE doesn't publicly discuss its investments and took steps to ensure this deal would also be secret. In an English-language letter dated Jan. 2, 2008, a SAFE official named Fang Shangpu wrote to the Costa Rican finance ministry setting out terms of the bond deal, including a request that Costa Rica "shall take necessary measures to prevent the disclosure of the financial terms of this operation and of SAFE as a purchaser of the bonds." On Jan. 7, finance minister Guillermo Zuniga replied in a letter saying "It is a pleasure for me to confirm that these suggestions are acceptable to us."

Costa Rica also published a letter by foreign ministry official Edgar Ugalde, confirming that SAFE's first investment of $150 million took place on Jan. 23, 2008. Asked to comment, the State Administration of Foreign Exchange said "the investment in Costa Rica government bonds is a normal investment activity for foreign exchange reserves," noting that it owns bonds issued by many other governments.

--Bai Lin in Shanghai and Miguel Gonzalez in Hong Kong contributed to this article.