The latest data shows that China now has a foreign reserve of $853.7 billion, surpassed Japan's $850.1 billion. But the structure of China's foreign reserve is changing and worrisome.
The source of China's reserve increasingly comes mainly from (short-term) capital investment abroad and foreign debt.
Looking at the ratio bet. the current year trade surplus and the newly increased foreign reserve in the same year:
In 1999, trade surplus contributed 300% of the newly increased foreign reserve (other items were negative); while in 2005, trade surplus only contributed 48.7% to the newly increased foreign reserve in the same year.
In four years bet. 2002-2005, China altogether had a trade surplus of $188.9 billion, while China's foreign reserve increased by $650.7 billion during the same period, so only 29.2% of the newly increased foreign reserve in those 4 years were from trade surplus.
Furthermore, in Capital Investment category, FDI, which is more stable and long-term, has been declining.
In other word, China's foreign reserve is much less stable now. Short-term foreign debt/capital/loan now has become the major source for the growth of China's foreign reserve! This trend has been increasingly worrisome since 2002.
So, just talking about China has largest foreign reserve in the world without considering the composition of the reserve and where does the reserve come from is very misleading.
Many economists think it is enough for China to have $300 billion foreign reserve under the normal situation. But due to >50% of China's foreign reserve are actually (short-term) foreign debt/hot money, there is no doubt China will have to have a much larger reserve than normal.
According to the calculation, from 1994 to the first half of 2005, long-term capital has been replaced by the short-term "hot money" from all over the world. In the first half of 2005, 79% of capital flowing into China was short term "hot money", and 89% of the capital flowing out of China was short-term "hot money". This is the highest in history.
This is the translation from a Chinese article, and here is the link
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