FWIW -- ANALYSIS - IS CHINA'S FOREX RESERVE TOO LARGE?
Publish Date : 3/13/2005 10:52:00 AM Source : Moneyplans.net Staff
China's foreign exchange reserve has reached US$600 billion, next only to Japan. Is this amount of foreign exchange reserve too large?
China's forex chief, Guo Shuqing, member of the National Committee of the China Political Consultative Conference (CPCC) and Director-General of the State Administration for Foreign Exchange Management (SAFEM), gave elaboration on the issue in an interview with the press.
Guo said that as an item of international payments, the growth of foreign exchange reserve is the result of the macroeconomic operation, but not the objective China is particularly pursuing. For a long time, China's international payment's have been kept in a balance, with slight surplus.
Adequate foreign exchange reserve is favorable for enhancing the payment abilities, the comprehensive national power and the creditability of the home currency of RMB, reducing risks of reform and safeguarding financial security.
Of course, he said, the excessive growth is unfavorable to the full utilization of the two markets and two resources and will affect the result of the macroeconomic control and regulation in terms of aggregates and structure. At present, China will continue to deepen reform, manage capital flow in a balanced manner and establish a market and management mechanism for regulating international payments.
Speaking of how do you manage such massive foreign exchange reserve of US$600 billion, Guo pointed out that at present, China mainly invests the foreign exchange reserve in government bonds, institutional bonds, corporate bonds and international organizations bonds that enjoy a high credit rating in order to ensure high security and fluidity of the exchange reserve. According to the related, the central bank holds the foreign exchange reserve and authorizes SAFEM to operate and manage. SAFEM has set up a central foreign exchange center to exercise specialized management.
For a long time, China has followed the principle of security, fluidity and added-value in standard and specialized asset management under the clear and sound authorization system. Through years of efforts, the management and operation of the foreign exchange reserve has become a complete system best suited to Chinese conditions, including management mode with investment benchmark as the core, an internal governance structure and scientific and advanced risk management system. It has also set up a contingent of specialized and young personnel. Besides, it has set up a routine internal audit and lawful check system to ensure security.
When talking about the source of the surplus of international payments, Guo said that China has maintained surplus in both current and capital accounts and such surpluses have been expanding since the beginning of 2001. Initial estimate shows that the surplus in the current account was US$70 billion in 2004 and that of capital and financial accounts, US$100 billion.
The net capital inflow is the main source of the surplus of China's international payments.
Guo said that China is a country with a high savings rate. For a long time, the domestic savings have been bigger than investment and that is the fundamental way out for the surplus of the current account.
Guo continued that besides, the stable economy, foreign investment policies, resources and cheap labor and good market prospects have been very attractive to FDI. These enterprises mostly engage in manufacturing and re-export and that has intensified the international payment pattern featuring surpluses in trade and investment.
Besides, the differences in the interests of base and foreign currencies and the anticipation of the appreciation of RMB have weakened the motives of institutions and individuals for holding foreign exchanges and enhance their sense of settlement. That is, too, another reason for the surplus of China's international payments.
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