With foreign exchange reserves worth US$853.6 billion at the end
of February, China now has the world's largest forex reserves,
surpassing Japan, the State Administration of Foreign Exchange
(SAFE) confirmed recently.
With less than US$10 billion in reserves in the early 1980s, the
massive growth in this area reflects China's developing robust
national economy. However, experts still debate if having such a
colossal forex reserve holding is necessarily a good thing.
More symbolic significance than practical
application
It came as no surprise that China would eventually amass the
world's largest forex reserves. In the last two years, annual
increments amounted to US$200 billion. By the end of 2005, China
had US$818.9 billion in forex reserves, still tens of billions less
than Japan, then the country with the largest forex reserves.
Japan's reserves in February 2006 decreased by US$1.6 billion,
while China maintained its steady growth.
"Being the world's largest holder of foreign exchange reserves
is nothing but a title, and its symbolic significance is greater
than its practical application," said Xu Hongyuan, a researcher
from the State Information Center, a governmental think-tank.
Wu Xiaoling, vice governor of the People's Bank of China (PBC),
China's central bank, said recently that there is no scientific
method of measuring what value of reserves is good for a country,
and it would not be accurate to merely make straightforward
comparisons between countries.
According to official statistics, per capita forex reserves in
China are estimated to be just over US$600, less than one tenth of
Japan's, and also far less than countries such as Singapore.
"China's foreign exchange reserves are not big if measured in per
capita terms," PBC Governor Zhou Xiaochuan said.
No joy without annoy
Experts acknowledge that some forex reserves are necessary for
strengthening a country's macro control ability and fending off
international financial risks. According to Dr. Mei Xinyu, a
researcher from the Chinese Academy of Foreign Trade and Economic
Cooperation under the Ministry of Commerce, a healthy reserves
balance for China means it is able to make international payments
and to tide itself over in the event of debt crises, negative
effects of speculative funds trading or a sudden drop in exports to
the international market.
Forex reserves can be used to reduce any negative impacts on
supply and demand in the domestic market, and help maintain the
normal operations and steady development of the national
economy.
But just how much does a country need in forex reserves to do
all this? According to Zhao Peng, president of the Industrial and
Commercial Bank of China (ICBC) Gansu Branch, reserves should be
able to sustain imports for at least three months. According to
international practice, foreign exchange reserves should be no less
than 30 percent of foreign debts. In 2005, China's imports valued
about US$660.1 billion, while its foreign debt was US$250 billion.
Taking into account factors including profits remitted out of the
country by foreign-funded enterprises, and forex demands for
financial reform, reserves in China should ideally be no more than
US$550 billion.
Current reserves far exceed that amount
As far as forex reserves are concerned, more isn't necessarily
better. Oversized reserves will put more pressure on financial
macro control and could harm economic development. It could also
lead to more trade frictions and give other countries an edge
against China. The management of oversized reserves also becomes
increasingly difficult.
As some experts point out, an increase in currency supplies can
restrict the use and effects of monetary policies. Foreign
currencies bought and held are shown as renminbi (RMB) equivalents
in the accounts books of the State Administration of Foreign
Exchange. An increase in forex means an increase in RMB supplies.
This affects prices, monetary authorities' ability to control
currency inflow, and the effectiveness of monetary policies.
In addition, a huge forex reserve lowers capital utilization
efficiency and correspondingly results in wastage. At the same
time, the costs and risks of keeping forex are also raised.
China isn't in blind pursuit of bursting forex reserves, Wu
Xiaoling told Xinhua News Agency in a recent interview. In fact,
exchange rate reforms mean that the central bank will play a
gradually less involved role as foreign exchange market watchdog,
depending on actual conditions. Simultaneously, it is working
towards reducing the growth of the country's forex reserves, a
clear indication that it will be paying more attention to economic
benefits and quality as opposed to blindly expanding its forex
coffers.
China's healthy forex reserve balance is a reflection of its
economic might. However, that strength is more a result of the
quantity of exports rather than a highly efficient production
capability. Rising trade surpluses and disputes all call for a
major overhaul of the country's foreign trade model and indeed its
economic structure.
On that front, SAFE has indicated that it will actively explore
ways of better utilizing forex reserves this year, further optimize
currencies and assets, and continue broadening investment
fields.
The four growth phases in China's forex reserves
development:
1978 - 1993:
Reserves were only US$1.6 billion in 1978. After the reform and
opening up policy was subsequently adopted, the figure gradually
increased through more export-boosting and import-controlling
efforts. In 1983, reserve reached US$8.9 billion. However, this was
thought too high, and was sharply slashed to US$2.1 billion in
1986. In the following years, the reserve gradually rebounded and
stabilized at between US$10 billion and US$20 billion.
1994 - 1997:
In 1994, China's foreign exchange management system underwent great
reform: exchange rate systems were unified; a company's right to
collect payment in foreign exchange earnings was withdrawn; banks
were authorized to settle and sell foreign exchange; and an
inter-bank foreign exchange trading market was established. Such
measures enabled the country's forex reserves to increase
comparatively quickly. Reserves rose 5.6 times to US$139.89 billion
at the end of 1997 from US$21.199 billion in 1993.
1998 - 2000:
As a result of the Asian financial crisis in 1997, the
growth of China's foreign exchange reserves slowed down
significantly. From 1998 to 2000, the increment was US$5.097
billion, US$9.715 billion and US$10.899 billion respectively. They
were only 14.62 percent, 27.87 percent and 31.27 percent of
increments in 1997. Nevertheless, China still managed to accumulate
US$165.574 billion by the end of 2000, and became one of the
world's largest holders of foreign exchange.
2001 - present:
Since 2001, China's forex reserves have grown at a
startling rate. From 2001 to 2005, increment of reserves was
US$46.591 billion, US$74.242 billion, US$116.844 billion,
US$206.681 billion and US$209 billion respectively. As at the end
of February, they were US$853.6 billion.
(China.org.cn by Tang Fuchun, April 10, 2006)