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China should keep sufficient foreign exchange reserves

By He Langsha, Liu Chang (China Economic Net)

16:48, October 09, 2011

Edited and Translated by People's Daily Online

China's foreign exchange reserve exceeded 1 trillion U.S. dollars for the first time in October 2006 and exceeded 2 trillion U.S. dollars in June 2009. However, it only took less than two years for China's foreign exchange reserves to increase from 2 trillion U.S. dollars to 3 trillion U.S. dollars. The "acceleration" was obvious in the growth of China's foreign exchange reserves.

The rapid stockpiling of the foreign exchange reserves reflects the good momentum of China's economic development. After China successfully withstood the impact of the international financial crisis, China's economic growth rate took the lead in recovery and China's trade surplus, and the foreign direct investment in China also increased accordingly. That is an important reason for the growth of China's foreign exchange reserves.

Foreign exchange reserves are a reflection of a country’s economic strength and can be used as an important tool for economic regulation, so it is easy to see the positive significance of the substantial increase in China’s foreign exchange reserves.

China had little foreign exchange reserves before the Reform and Opening-up, with an annual average increase of only 500 million U.S. dollars. At the time, China was implementing a closed planned economy, without borrowing money from abroad or introducing foreign capital. In brief, the country seldom conducted international trade, and had a limited amount of foreign exchange reserves.

However, it has witnessed rapid economic growth since 1994, and its gross domestic product grew nearly three fold from 1993 to 2002. Rapid economic development has greatly promoted the growth of its foreign exchange reserves. China introduced a mandatory system for the settlement and sale of foreign exchange in early 1994, which stipulated that except for certain foreign-invested enterprises, which can retain their foreign exchange accounts, domestic enterprises must sell their foreign currency earnings that exceed their quotas to designated foreign exchange banks.

This system led to a modest growth in the country's foreign exchange reserves. Furthermore, thanks to China’s constant efforts to open up to the outside world and improve its investment environment, it became the world's largest recipient of foreign direct investments for the first time in 2002. The steady FDI growth has contributed much to China's trade surplus under both current and capital accounts, laying a solid foundation for the steady growth in its foreign exchange reserves.

It should be pointed out that China's State Administration of Foreign Exchange issued a notice on Jan. 1, 2011 specifying that domestic exporters can keep their foreign currency earnings offshore from then on, which put an end to the mandatory system for foreign exchange settlement and sales.

China's huge foreign exchange reserves, which total 3.2 trillion U.S. dollars, have drawn public scrutiny. In addition to the figure, the public has had enhance their understanding of foreign exchange reserves. China's economy has been highly integrated into the world economy through the course of economic globalization in terms of trade and the flow of human and material resources, cash and information.

Today, Chinese enterprises can retain foreign exchange according to the needs of their business operations or convert it into RMB, and they can also easily use and purchase foreign exchange; it is increasingly convenient for ordinary Chinese people to buy and use foreign exchange in order to travel abroad or cover the tuitions of their children studying abroad. Following the constant improvement in foreign exchange utilization policies by the State Administration of Foreign Exchange and the regulation and development of the foreign exchange market, foreign trade enterprises and ordinary people as foreign exchange buyers and users will enjoy more convenience.

Given the deterioration of the U.S. and European debt crises, issues such as whether China should invest less foreign exchange reserves in the U.S. sovereign debt or whether China should use its foreign exchange reserves to buy European sovereign debt have attracted the attention of the Chinese people from all walks of life.

China has managed foreign exchange reserves in accordance with the principles of safety, liquidity and returns. China is a responsible long-term investor in the international market and the returns on its foreign exchange reserves can never be the highest within an individual year, but China has achieved stable and relatively good returns on foreign exchange reserves over recent years, in an attempt to fulfill the goal of preserving and increasing the value of the foreign exchange reserves. China should keep sufficient foreign exchange reserves as a major developing country, which is of great significance to ensure its international solvency power, strengthen its risk management capacities and preserving its financial and economic security.

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