BEIJING - China's
foreign-exchange reserve reached US$954.5 billion
in July, posting an increase of $135.6 billion
since the beginning of the year. At a monthly
average growth of $19.37 billion, the reserve is
likely to top $1 trillion by mid-October.
Although a huge foreign-exchange reserve
to some extent represents the strength of an
economy, it brings more problems than benefits.
Sharp growth in the foreign-exchange
reserve in recent years has
led
to great pressure on money-supply controls in
China. More foreign-exchange reserve demands more
hedging money in local currency, which may weaken
the controlling capacity of China's monetary
policy, impose pressure on the appreciation of the
yuan, and exacerbate foreign-trade frictions.
What's worse, it seems that the enthusiasm
for foreign investment in China has not cooled
down and the trade surplus is still growing fast.
Therefore, the foreign-exchange reserve will
continue speedy growth, and is expected easily to
come to $2 trillion by 2010. By then, the enormous
foreign-exchange reserve will bring out a series
of uncontrollable effects, said Ba Shusong, vice
director of the Development Research Center of the
State Council.
The scale of central-bank
bills for hedging the huge foreign-exchange
reserve will increase, which means that the
interest rate and hedging cost will rise. Besides,
the growing foreign-exchange reserve will
accelerate the total assets in the central bank's
balance sheet, more than 80% of which are expected
to be foreign exchange.
Moreover, too much
foreign-exchange reserve will change the asset
structure of commercial banks, which have to hold
in hand large amounts of central-bank bills and to
bear the burden of a higher deposit-reserve ratio
and maintain diversified controls on credit. Ba
also warned that potential depreciation of the
greenback will also threaten the safety of China's
foreign-exchange reserves.
Statistics show
that China's foreign-exchange reserve rose $209
billion in 2005, and in the meantime, China bought
$200.4 billion worth of US Treasury bonds. Some
80% of China's foreign-exchange reserve is
estimated to be in highly fluid US Treasury bonds.
A recent research report released by
China's National Bureau of Statistics said that
because of the worsening deficits in the United
States' foreign trade and finance, it is possible
for the greenback to continue its downward trend.
As a result, China's dollar-dominated assets will
shrink in value, and the anticipation of
appreciation of the yuan will grow.
At
present, two main problems faced by the Chinese
government are how to curb the overheating growth
of foreign exchange and how to make good use of
it. Yu Yongding, director of the Institute of
World Economy of the Chinese Academy of Social
Sciences, attributed the rocketing
foreign-exchange reserve to the 15-year surplus of
China's current account and capital account in the
balance of payments, which is also the result of
the internal and external imbalance of China's
economy.
To reduce the two surpluses, the
government should increase the import of
commodities and technology, which can facilitate
domestic industrial restructuring and technical
improvement, and encourage citizens to possess
foreign exchange.
What is more important
is to perfect the forming mechanism of the
foreign-exchange rate in China to reinforce the
flexibility of the exchange rate and enlarge its
floating range, so that the risk cost for
speculative funds in and out of China will
increase and speculative operations will be
curbed.
Premier Wen Jiabao said China will
use the foreign-exchange reserve to increase the
import of assets in kind and advanced
technologies; support financial reform and
enterprises' restructuring and reform; remove
limitations on using foreign currency; and
accelerate the import of reserve assets.
This is the first time a Chinese leader
has favored diversifying the use of the
foreign-exchange reserve, indicating that central
government officials have reached a common
understanding on the proper operation of the
reserve, said an analyst with the Development
Research Center of the State Council.
At
present, the most popular ideas for best using the
foreign-exchange reserve include: buying petroleum
and scarce resources from abroad and participating
in or acquiring overseas companies; introducing
sub-core techniques and advanced devices overseas
to foster domestic independent innovation;
participating in or acquiring leading
multinational companies, including financial
institutions; and gradually enriching the gold
reserve.
Xia Bin, director in charge of
the Finance School of the Development Research
Center, has pointed out another six approaches to
using the reserve:
One-off investing in or acquiring local small
and medium-sized banks to shift the holdings from
local governments to the central government.
Encouraging foreign and domestic companies to
list on the domestic stock market, and encouraging
domestic financial institutions to provide loans
in foreign exchange to foreign companies now with
a total investment of at least $500 billion in
China. Foreign companies would be called to issue
bonds in dollars in China, to raise money for
importing equipment, technologies and production
lines abroad.
Domestic companies and institutions in foreign
debt would be asked to repay the debt in advance
by buying foreign exchange with yuan or bank loans
under the precondition that the activity will not
violate their contracts. Meanwhile, they would not
be encouraged to issue bonds overseas.
The government should buy a large amount of
equipment and technology with foreign exchange and
sell it to domestic companies and institutions at
a lower price so as to withdraw yuan. This would
boost the development of relevant sectors.
On the basis of continuing to improve the
fiscal expense structure, reducing direct
investment and enlarging public service input, the
government should expand the scale of the fiscal
deficit and issue longer-term Treasury bonds.
The government could appropriate a certain
amount of foreign exchange for filling the big gap
in China's social-security fund, which could be
invested with the return on the investment
belonging to the fund. But the central bank has
the right to take back all or part of the
principal from the social-security fund if
necessary.
