Forex reserves need effective management
By Yi Xianrong (China Daily)Updated: 2006-11-28 09:59
The fast pace of China's accumulation of foreign exchange reserves caught
worldwide attention as the country recently became the world's largest reserve
holder with more than US$1 trillion.
To many, such a stunning amount in
foreign exchange reserves is not in China's interest as it will lead to losses
in national welfare, increased financial risks and high prices if it continues.
Therefore, they argued, part of the reserves should be used to establish
strategic resource reserves, assist technological upgrades of State-owned
enterprises, push reform of financial institutions, fill the gap in the social
security fund or even finance the low-cost housing programme.
Those
suggestions, as Wu Xiaoling, vice-governor of the People's Bank of China, the
central bank, said, ignore the fact that the foreign exchange reserves are
bought by the State by providing basic money and are not fortunes that can be
poured freely into policy programmes.
In other words, foreign exchange
reserves, unlike tax revenue, cannot be taken as a means to transfer payments.
They are recorded as liabilities on the balance sheet of the central bank and if
they were used for domestic expenditure, the bank's balance sheet would not
change and the liabilities would remain.
If we do not consider issues
such as the country's ability to make international payments or prevent
financial risk, the large amount of reserves in itself would not be seen as a
serious menace.
China has a population of 1.3 billion, which means a
Chinese on average shoulders only less than US$1,000. But this meagre amount is
nothing to worry about.
Moreover, China is a large, transitional economy
and the risks and fluctuations that may possibly emerge during the process of
transition are certainly more severe than those mature market economies or
economies of smaller scale. In this sense, China's foreign exchange reserves,
although as large as US$1 trillion, should not become a cause for concern, but
rather they can provide an anchor for the country's economic transition.
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