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Are China's forex reserves too big?

By Tian Junrong (People's Daily)

15:22, October 18, 2011

Edited and Translated by People's Daily Online

China's foreign exchange reserves have been growing rapidly since the beginning of the RMB exchange rate reform and have far exceeded a traditionally recognized bottom warning line due to the country's rapid economic development in recent years.

The total amount of China's forex reserves surpassed that of Japan and ranked first in the world for the first time in February 2006 and exceeded 1 trillion U.S. dollars in October 2006, 2 trillion U.S. dollars in April 2009 and 3 trillion U.S. dollars in March 2011. Given the steep increases of its reserves, some people may be wondering whether China's foreign exchange reserves are too big.

In fact, there is an internationally recognized bottom line of a country's foreign exchange reserves, but no unified highest limits. 'Traditionally speaking, a country's foreign exchange reserves should cover at least three months of imports, 10 percent of gross domestic product and 30 percent of national debt. China's foreign exchange reserves amounted to nearly 2.9 trillion U.S. dollars by the end of last year, representing 22.5 months of imports, more than 48 percent of GDP and 520 percent national debt," said Ding Zhijie, a professor at the University of International Business and Economics.

Ding said China's foreign exchange reserves have traditionally, far exceeded the bottom line limit.

"At present, there are no unified standards about the reasonable amount of foreign exchange reserves. In this respect, a country should take many factors into consideration, such as its macroeconomic conditions, the opening of its economy, the ability to make use of foreign capital and financing and the maturity of its financial system," Ding said.

For instance, China's foreign exchange reserves are mostly "in the hands of the government." Compared with 3.2 trillion U.S. dollars of China's foreign exchange reserves, enterprises and citizens have only 250 billion U.S. dollars in foreign exchange deposits, while the government holds the majority of the foreign exchange assets.

However, foreign exchange assets are mostly "in the hands of citizens" in Western countries. Private foreign exchange assets in Japan, Germany, the United Kingdom and the United States stood at 5 trillion U.S. dollars, 6.9 trillion U.S. dollars, 12.8 trillion U.S. dollars and 15.4 trillion U.S. dollars respectively at the end of 2010. Although the amount of the foreign exchange reserves held by the governments in the Western countries is less than that in China, the amount of their total foreign exchange assets are far greater than that of China after private foreign exchange assets are calculated.

As for a major developing country like China, maintaining sufficient foreign exchange reserves is of great significance to ensure the country's international liquidity, enhance risk management capacity and preserve economic and financial security.

It is noteworthy that it was never the intention of China's leaders to amass such a huge amount of foreign reserves. The reserves are just a result of the development of China's economy in a traditional pattern.


Leave your comment5 comments

  1. Name

Sasi at 2011-10-25122.178.182.*
The Chinese reserves are from exports,that means the people who made the exports were paid less for their effort,better put money in people"s pockets instead of US Bonds.
Ai E-fu at 2011-10-1983.170.92.*
In other words, this leadership is shortchanging its people if i does not know how to return the money to the peoples" pockets. Singapore can do it, Mngolia can do, Malaysia can do it but Beijing seem unable to do it.
Nic at 2011-10-19175.141.160.*
China"s forex reserves are big by current standard.But, do not wallow, look inside yourself as here are a lot of work to be done to make China a clean and comfortable place to live for now and in future.Use the reserves prudently, what goes round will come around and you may not have the same happy times in future.I hope the leaders will look into their environment, water supplies, transportation and raw materials that they lack and this is the best time to accumulate them now.There are talks of long period of recession, US and European collapse....your $ reserves will also dwindle accordingly; so why not make the best use of them by building your other strategic "reseves" up now?The reserves are huge on paper but not big if you want to use them to develope a hugh country like China.
helen at 2011-10-19203.82.82.*
It is not the magnitude of foreign reserves that is the issue here. It"s how you invest them that indicates your prudence or foolishness."Riding the Weimar US$ Tiger" and walking direct into the US entrapment is a sure way to economic suicide. Political leverage is rapidly eroded and your foreign reserves will dwindle into never land. Chinese leaders and the CPC will have to account to the Chinese people when the time comes ....
ASEAN at 2011-10-18220.255.2.*
Use part of your reserve to clean up the whole of China fast. Put in a stricter law and enforce the law to protect the environment before it is too late. What is the use of having trillion of dollars in reserve ? Whatever money you have should be put to good use to make China a better place. Are you not aware that the air, water and land in China is heavily polluted compare to 5 years ago ? It is getting very bad. Recently my friend who is working abroad went back to home to China, he told me that the pollution make him sick. It is getting very bad and obvious. Can someone get this message to the Chinese leaders in Beijing ?

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