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��Home>>China Observer
China's high forex reserve too early to celebrate
www.chinanews.cn 2006-04-05 18:18:01
Chinanews, April. 5 �C China currently had registered 853.6 billion US
dollars of foreign exchange reserve by the end of February. The news,
after being speculated by media for a week, was finally confirmed by
Premier Wen Jiabao in his speech on Monday. The figure shows that China
has now become the world's largest country in foreign exchange reserve.
Some people might think this is good news under a traditional notion that
the more foreign exchange reserve a country has, the more powerful the
country is. Various media reports also play up the news, applauding the
fact that China's foreign exchange reserve has now surpassed Japan to
become the No. 1 in the world. However, in terms of China's current
economic status, it might be good for us to take a second thought before
celebrating.
Mr. Huang Yiping, Chief Economist of the Citigroup Global Markets
(Greater China) Ltd., said that China's radidly soaring foreign exchange
reserve, boosted by China's trade surplus and the increasing direct
foreign investment, might put the country under a greater pressure for
its Renminbi revaluation. According to the latest trade figures released
by the United States, in January, trade deficit between China and the
United States further rose to 17.9 billion US dollars. This increased
trade deficit prompted two U.S. congressmen to make a new proposal last
week, urging the Bush administration to take a harder stance for China's
Renminbi appreciation.
Huang's opinion was echoed by Chen Xuming from the FTChinese. Com, who
warned that China��'s large foreign exchange reserve figure does not mean
that the country can rest easy now. On the contrary, it will put China
under a greater risk resulting from global interest rate fluctuations,
and make it harder for China to allocate these foreign exchange reserves.
For China's central bank and various local foreign exchange management
institutions, large foreign exchange reserve will also make it harder for
them to properly manage these reserves. If any mistake occurs, China's
national economy will be easily exposed to greater risks.
Deputy Governor of the People's Bank of China Wu Xiaoling, whose proposal
to disperse foreign exchange reserves among the gereral public a week
ago, also expressed her concern over this issue. Under the current
foreign exchange management system, China's central bank has an unlimited
liability to buy back all foreign capital. As China's foreign exchange
reserves increase, the central bank has to use large amounts of money to
buy these reserves, which will restrict the central bank's macro control
capability aggregatively and limit its choices in making monetary
policies.
To Wu, encouraging the public to buy foreign exchange reserves is an
effective way to avoid high risks that large reserves will impose on the
national economy. In the proposal, the foreign reserves will be scattered
among individuals, and when needed, the state can collect them at any
time. In this way, high risks resulting from interest rates will be
dissolved, and companies and individuals will also have an additional
financing channel for their economic activities. In order to encourage
individuals to buy foreign exchange, the central bank will need to speed
up its capital reform, to improve the foreign currency market and
diversify its foreign currency investment products. Some experts say that
if the proposal is implemented, more Chinese individuals will benefit
from it.
On the whole, the ample foreign exchange reserve serves as a double-edged
sword. On one hand, it can safeguard China's national economy. On the
other hand, it may also become a heavy financial burden for China and
potential risks might also emerge in the global market. China needs to
take advantage of its huge foreign exchange reserves and make appropriate
adjustments in a changing environment.
��Soaring forex reserve challenges financial strategy
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