An insider has disclosed that China's foreign exchange reserves topped 845.2 billion and 853.7 billion dollars respectively at the end of January and February in 2006. Given Japan's reserves of 851.7 billion and 850.1 billion dollars for the corresponding months, China is expected to have for the first time surpassed Japan to have the largest foreign exchange reserves in the world. The statistics are yet to be confirmed by China's central bank, the People's Bank of China. Official statistics of China's foreign exchange reserves in the first quarter will be published in mid-April as a routine.

Indeed, the huge amount of foreign exchange reserves has brought a lot of benefit to the country. However, it also reflects the continuing imbalance in domestic economy in China. At the 3rd China Pfandbrief Investor Annual Conference on Monday, speakers and guests gave their assessment on the surge of China's foreign exchange reserves.

Wei Benhua, deputy director of the State Administration of Foreign Exchange (SAFE), said that at present China has sufficient foreign exchange reserve, which maintains a sustaining growth and is conducive to the reputation of the country and the Chinese enterprises both at home and abroad. The sufficient foreign exchange reserves can enhance the people's confidence in China's economy and the Chinese Yuan which can help promote international trade, attract foreign investment, and lower the financing cost for domestic enterprises. It is also conducive to maintaining financial system stability, dealing with sudden events, keeping the balance of international payments, and keeping alert against and clearing up international financial risks.

Wang Zhihao, senior economist of Standard Chartered Bank, agreed that China's exceeding Japan to have the world's largest foreign exchange reserves has its symbolic significance. However, "taking into consideration the fact that China has a smaller economic scale than Japan, it actually keeps a higher proportion of the foreign exchange reserves in the GDP than Japan".

Given the fact of the high-speed growth for foreign exchange reserves since 2002, it is only a matter of time for China to surpass Japan, said Ding Zhijie, professor of the University of International Business and Economics. According to Ding, foreign exchange reserves' drastic increase is a result of the imbalance of the international payments. Even a surplus also reflects a kind of imbalance in domestic economy.

Implications can be easily found from the recent statement on "allowing the people to hold the foreign currencies" by Wu Xiaoling, deputy governor of the People's Bank of China. According to Wei Benhua, China has invested the majority of its foreign exchange reserves in high-grade overseas bonds issued by states, international financial organizations, government organs, companies, etc. It has been pursuing a long-term and strategic development philosophy.

"Wu should have been informed of China's exceeding Japan's reserves", Ding analyzed, "therefore her statement has very important implications for China's following policy".

Liu Weiming, chief foreign exchange analyst of Beijing Branch of China Merchants Bank, pointed out that instead of the policy of "holding the foreign currencies by the country" which requires the state to undertake the risks, the policy of "allowing the people to hold the foreign exchange" makes both people and market to share the risks of foreign exchange rates. However, a mature foreign exchange market that provides diverse tools to hedge the risks has to be established before the central bank asks the people and the market to share these risks. Obviously, China's foreign exchange market is not mature enough.

In addition, the implementation of the policy of "allowing the people to hold foreign currencies" requires sufficient foreign exchange market and a variety of products for the enterprise and individual investment. Thus, the new policy proposed by the central bank will accelerate capital accounts reform, improve foreign exchange market, and promote foreign exchange investment varieties.

Ding also proposed to securitize foreign exchange reserves, that is to turn a portion of foreign exchange reserves into enterprises and individual foreign exchange assets through issuing securities. This will not only reduce the pressure on the ballooning reserves, but also can indirectly provide the residents with a channel for overseas portfolio investment.

Meanwhile, other worries for too much foreign exchange reserves are the stability of foreign exchange source and the irrational structure of China's foreign exchange reserves.

By People's Daily Online