Worries on Foreign Exchange Reserves Unwarranted

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Last updated at: (Beijing Time) Thursday, August 07, 2003

Worries on Foreign Exchange Reserves Unwarranted

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The volume of China's foreign exchange reserves may be huge compared with that of other countries, but concern over the figure is unnecessary given the country's actual situation, said an article in the Shanghai Securities Journal.

China's foreign exchange reserves kept up robust growth despite the blow dealt by SARS in the first half of the year. Reserves increased by US$60.1 billion during that period and had reached US$346.5 billion by the end of June, achieving a 42.7 per cent year-on-year growth.

Compared with the same period of last year, the rise is US$29.5 billion more and 8.5 percentage points higher.

A developing country, China has ranked second in the world in terms of foreign exchange reserve volume.

Such a steep increase over the already-huge amount of foreign exchange reserves from previous years is obviously unexpected for many, some of whom are concerned whether the number may be too large for China, said the article.

Li Zhenqin, a financial analyst based in the United States, expressed his worries over potential risks of China's huge foreign exchange reserves, though he admitted that it does help to resolve the impact of global currency fluctuation on the Chinese economy.

"China is an economy subject to partial foreign exchange control. The necessity of keeping such huge reserves as emergency funds against international speculation is really debatable," Li said.

Qiu Xiaohua, deputy director of the National Bureau of Statistics, suggested that the volume of foreign exchange reserves should not be analyzed solely on the basis of the country's current economic situation.

"Considering China's development in the near future, more reserves of foreign currencies are needed," Qiu was quoted as saying.

He summarized the significance of maintaining a large volume of foreign exchange reserves into three points, the article said.

First, the reserves would be a solid base for resisting international financial risks.

Second, the huge assets would play a key role in the nation's economic restructuring by helping with technology upgrades and furthering reform.

Third, the massive amount of foreign exchange funds is a precondition for the ultimate full convertibility of renminbi.

A rough balance between exports and imports, with a slight surplus, is expected in the following years and more foreign exchange is likely to come as a result of growth in service trade, such as tourism, Qiu said.

The government has always had an unequivocal attitude upon the country's foreign exchange reserves.

Guo Shuqing, director of the State Administration of Foreign Exchange, expressed his opinion explicitly this March.

Guo said there is no uniform standard for how much foreign exchange reserves a country should have, either in theory or practice.

In calculating its foreign exchange reserves, a country must take into account the comprehensive strength of its economy, including factors like the scale, growth rate and openness of its economy, foreign trade development, its capability to lure foreign capital and macroeconomic management.

Given the reality in different countries, the amount of foreign exchange reserves vary dramatically across the planet.

Generally speaking, developed countries usually keep their reserves of foreign funds at a low level, because their currencies could be directly used in international trade settlements. In most of countries, the foreign exchange rate could be freely floated.

By contrast, most developing countries do not have adequate foreign exchanges while their own currencies are not fully convertible. As a result, developing countries would have fairly large reserves of foreign funds.

Guo Shuqing said the growth in China's foreign exchange reserves in recent years matches well with the country's economic situation. It also conforms to the country's foreign exchange arrangement, especially that concerning the compulsory settlement of foreign exchange and managed floating exchange system, the article quoted Guo as saying.

"Of course, every decision involves costs and risks. But the macroeconomic situation should not be ignored in weighing the costs and returns of foreign exchange reserves. The major significance lies in keeping the balance of international payments and safeguarding economic security," Guo said.

His opinion was echoed by other world-renowned economists.

Robert A. Mundell, winner of the Nobel Prize in Economics in 1999 from Columbia University, held that under the framework of conventional theories, it would be proper for China to keep its foreign exchange reserves at around US$100 billion. However, China's actual reserves should be far beyond that figure given its special situation: Its financial system here is not sound enough and the renminbi is not convertible.

As a result, China should have larger foreign exchange reserves to prevent speculative money from disturbing the nation's economic stability and financial security, said the article.

Mundell said it is unnecessary for China to worry about its large volume of foreign exchange reserves. Sufficient reserves are a desirable asset for the country, providing effective support for the convertibility of renminbi in the future. (China Daily)

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