Are China's foreign exchange reserves accurate?

By the end of June this year, the national composition of foreign exchange reserves had reached 941 billion Yuan, equivalent of 35 percent of GDP and ranking as the world's top. The enormous FOREX reserves not only cause people to consider whether these are now excessive, but also consider how to dissolve the risk of U.S. dollar reserves in FOREX reserves.

U.S. dollar reserves have accounted approximately for 70 percent of China's national FOREX reserves. According to public data, by the end of November 2005, China held around US$ 250 billion of U.S. treasury bonds of. Under pressure from the appreciation of RMB, the U.S. dollar would devalue. Although appreciation of the RMB could encourage people's purchasing power, it also means a devaluation in FOREX reserves since the U.S. asset is a bull share of all China's foreign reserves.

When considered from a long-term perspective, gold reserves should be added into the structural share to ensure the financial safety in national FOREX reserves, which would be more effective than raising any national monetary assets. The structural adjustment of FOREX exchange reserves should be in line with the changes of international and national markets.

Prof. Ding Zhijie, Assistant Dean of School of Finance and Banking, University of International Business and Economics believes that during the internal structural optimization process of national FOREX reserves and currencies. The management of FOREX exchanges should follow the principle of mobility, safety as well as stability. Under that circumstance, the diversification of FOREX exchanges should be carried out step by step.

Prof. Zhang Liqing, Assistant Dean of School of Finance, Central University of Finance and Economics and Director of Research Centre for International Finance, argued that the rapid decrease in holdings of U.S. dollars could lead to the accelerated decline of U.S. dollars. Therefore, the decrease in holdings of U.S. should be a relatively slow process.

When entering the 21st century, global FOREX reserves witnessed rapid growth, which mainly came from developing countries, whilst developed countries remained the same. 2002-4 statistics show that the favorable balance of capital account contributed to 60 percent of growth of the newly added FOREX reserves.

"We should realize that there is an inflow of capital from developing nations and a prop from the expected RMB appreciation behind rapid growth of FOREX reserves in developing countries. Therefore, it must be exaggerated. What is exaggerated is the international capital inflows, the increase of debt reserves achieved through international capital inflows," pointed out Ding.

Therefore, national FOREX reserves require a very cautious strategy. The flow of capital may slow down if the domestic economic situation changes. Major investment is not easily cashed out and this would impair the mobility of FOREX reserves.

By People's Daily Online