BEIJING - China's
more than US$1 trillion foreign-exchange reserve,
while showing the rise of China as a world power,
is not money that can be spent casually.
Domestic and foreign experts have
suggested many ways of managing this sum and some
have suggested spending some of it.
Some
experts have suggested that China use the money to
import high-tech equipment, while others have
recommended
spending it on
improving domestic education, medical care and
environmental protection. In general, these people
held that it is better to spend money in the above
areas than simply to invest it in US Treasury
bonds.
These suggestions seem reasonable,
but this reserve should be used cautiously,
officials say.
According to China's
existing foreign-exchange regime, enterprises and
individuals are not permitted to hold foreign
currency. They must sell it to banks and consume
in the Chinese currency, while China's central
bank must issue base money to buy the inflowing
foreign exchange in various forms. This means that
the foreign-exchange reserve is bought by the
central People's Bank of China (PBOC).
In
fact, the foreign-exchange reserve is the same as
the assets under the management of commercial
banks. Moreover, to maintain the existing managed
floating-exchange-rate regime, the PBOC must buy
some foreign funds, including US dollars, to keep
the yuan exchange rate floating in a reasonable
range.
So although the foreign-exchange
reserves are assets of the central bank, they are
also liabilities.
Statistics show that the
monthly foreign-exchange-occupied yuan amount has
grown 30% since the beginning of this year,
topping 8 trillion yuan (about $1 billion) by the
end of September. The rising
foreign-exchange-occupied yuan amount has induced
China to supply more currency, which has increased
inflation and reduced the scope for financial
control.
As for the suggestion of
replenishing social-security accounts or buying
strategic oil reserves with the foreign-exchange
reserve, Wu Xiaoling, vice governor of the PBOC,
said this would amount to fiscal-overdraft
behavior and is impossible. If other institutions
want to use the reserve, they must spend yuan to
buy it.
Some foreign scholars believe that
the central bank can buy foreign assets such as US
Treasury bonds or buy back some equities of large
state-owned banks, but the PBOC cannot invest
foreign-exchange reserve in policy projects.
Wu said the PBOC is responsible for the
management of the reserve and must ensure its
preservation and appreciation, adding that the
investment in the state-owned commercial banks is
a kind of direct investment of
foreign-exchange-reserve assets.
She said
she believes the foreign-exchange reserve in these
commercial banks will appreciate by a wide margin
after listing. If the reserve is consumed on the
domestic market, the foreign exchanges will have
to be settled twice and the currency will be put
on to the market twice, which will directly cause
inflation.
China must be cautious in using
its $1 trillion foreign-exchange reserve. China's
reserve had never surpassed $1 billion before 1979
and it was even reported as negative in some
years.
With China's opening up,
sustainable economic growth and development of
foreign trade, the foreign-exchange reserve
soared. Over the past 26 years, it has rocketed
from zero to the current level of more than $1
trillion.
The foreign-exchange reserve
climbed to $2.7 billion at the end of 1981 for the
first time, breaking the $10 billion benchmark in
1990 with $11.09 billion, topping $100 billion at
the end of 1996 by hitting $105.05 billion,
reaching $212.1 billion at the end of 2001, $609.9
billion in 2004 and $818.9 billion at the end of
2005.
The reserve grew to $853.6 billion
at the end of February this year, overtaking
Japan's to become the world's largest
foreign-exchange reserve. The amount is still
rising.
