What China should do at present is to urge the US government to maintain the stability of exchange and interest rates, said Sun Lijian, deputy dean and professor of Finance at the Economic School of Fudan University, in an interview with the overseas edition of People's Daily. "Only when the foreign capital injection in the Chinese market becomes stable in the long term, would the Chinese government place structural adjustments to increase forex reserve on its agenda."
He believes that the scale of forex reserve will become increasingly unstable. The increase of reserves is mainly caused by a flood of hot money into China; therefore, the Chinese government's strategy of enhancing the effective operation of forex reserve has been seriously weakened.
If China continues to use its forex reserve for overseas mergers, the acquisition of resource-based enterprises, purchasing necessary technology and products with high added values, for a long term investment, China will suddenly discover that a huge volume of forex reserve cannot turn into highly liquid currency and short-term bonds immediately, and will have to pay a higher cost when it needs to use the reserve to withstand the risks of a considerable depreciation in the exchange rate and rising pressure of inflation when idle domestic funds withdraw.
Therefore, in this sense, the Chinese Government's investment of forex reserve into highly liquid short-term US Treasury bills is a wise move to maintain the stability of the financial system.
China should urge the US government to maintain the stability of exchange and interest rates and take measures to prevent the negative impact brought about by hot money outflow from China's economy and financial market.
Meanwhile, China should also strengthen its control and effective management of information about the injection and withdrawal of foreign capital.
By People's Daily Online