Glamor Economics

Chapter 127

Chapter 16, Section 7 High Surplus Breeds "Chinese Myth"—Foreign Exchange Reserves

As of the end of February 2006, the total amount of foreign exchange reserves in mainland China was 2 billion US dollars (excluding the foreign exchange reserves of Hong Kong and Macau), surpassing Japan for the first time and ranking first in the world.As of the end of April 8537, China's foreign exchange reserves had increased to US$2008 trillion, which was larger than the total foreign exchange reserves of other countries and regions in Northeast Asia. , the United Kingdom, Germany, France, Canada, Italy, referred to as the G4).Subsequently, China's foreign exchange reserves continued to rise, reaching a record US$1.76 billion by the end of September 7.Affected by the global financial crisis, coupled with fluctuations in the exchange rates of the U.S. dollar, the euro, and the renminbi, at the end of October 7, China's foreign exchange reserves fell below 2008 trillion U.S. dollars, the first drop since the end of 9.As of December 19056, China's foreign exchange reserves have reached 2008 billion. In June 10, China's foreign exchange reserves exceeded 1.89 trillion US dollars, and China became the first country in the world whose foreign exchange reserves exceeded 2003 trillion US dollars.As of March 2008, China's foreign exchange reserves reached US$12 billion.

The increase in foreign exchange reserves mainly comes from the surplus in the balance of payments.Since the reform and opening up, China's economic development has advanced by leaps and bounds. One of the most prominent features is that the growth of foreign trade is faster than the growth of the national economy. The dependence on foreign trade continues to rise to the highest level in the world. China's export-oriented strategy for many years has created the world's largest foreign exchange for China Reserve, international organizations believe that China's foreign trade myth is the biggest success story in the era of globalization.It is the successive years of trade surplus that has accumulated such a huge foreign exchange reserve.

In Hong Kong, China in August 1998, "the rain is about to come and the building is full of wind".Soros mobilized a huge amount of funds to attack the Hong Kong dollar, and Hong Kong's linked exchange rate system was precarious for a while. From August 8th to August 8th, the Hong Kong Special Administrative Region government successively mobilized 14 billion Hong Kong dollars of foreign exchange reserves into the market, and launched a fierce "hand-to-hand battle" with international speculators.Soros suffered a head-on blow and finally returned home. The Hong Kong Special Administrative Region government successfully defended Hong Kong's pegged exchange rate system.In this financial blocking war, the role of foreign exchange reserves cannot be underestimated.

Many people think that the more foreign exchange reserves, the stronger the country's economy. In fact, the amount of foreign exchange reserves held may not necessarily represent the quality of the country's economic development.As a symbol of a country's economic and financial strength, foreign exchange reserves are the material basis for making up the country's balance of payments deficit, resisting financial turmoil, stabilizing the country's exchange rate, and maintaining its international reputation.For developing countries, it is often necessary to hold foreign exchange reserves higher than the conventional level.However, more foreign exchange reserves are not always better. In recent years, the rapid expansion of China's foreign exchange reserves has had many negative effects on economic development.

1. Harm the potential for economic growth.The inflow of foreign exchange reserves of a certain scale represents the outflow of physical resources of a corresponding scale, which is not conducive to the growth of the domestic economy.If the extraordinary growth of China's foreign exchange reserves continues, it will damage the growth potential of the economy.

2. Bring loss in spread.According to a conservative estimate, based on 2% of the difference between the investment profit rate and the foreign exchange reserve rate of return, if you have 6000 billion US dollars of foreign exchange reserves, the annual loss will be as high as more than 100 billion US dollars.This potential loss is even greater if the risk of exchange rate fluctuations is taken into account.In addition, most of the foreign exchange reserves of many countries are US dollar assets. If the US dollar depreciates, the country's reserve assets will shrink severely.

3. There is a high opportunity cost loss.China introduces about 500 billion US dollars of foreign investment every year, for which the country has to provide a lot of tax incentives; at the same time, China holds more than 1 trillion US dollars of foreign exchange reserves, which are idle.In this way, on the one hand, the state's fiscal revenue will decrease, and on the other hand, ordinary people will live frugally and lend money to foreigners. The potential opportunity cost cannot be ignored.

4. Weakened the effect of macro-control.Under the current foreign exchange management system, the central bank has unlimited responsibility for the repurchase of foreign exchange funds. Therefore, with the growth of foreign exchange reserves, the amount of funds invested in foreign exchange has continued to increase.The rapid growth of foreign exchange funds has not only restricted the effectiveness of macro-control since 2004 in terms of total volume, but also weakened the effect of macro-control structurally, further increasing the pressure of RMB appreciation, and reducing the room for the central bank to regulate monetary policy. .

5. Influence the application of international preferential loans.Excessive foreign exchange reserves will deprive China of preferential loans from the International Monetary Fund (IMF).According to the IMF's regulations, countries with sufficient foreign exchange reserves not only cannot enjoy the preferential low-interest loans of the organization, but must also provide assistance to other member countries with balance of payments difficulties when necessary.This is not a good thing for China.

6. Accelerate the inflow of hot money, trigger or accelerate the country's inflation.

The essence of inflation is that the supply of money in circulation is greater than the demand for money. The influx of international hot money has led to an increase in foreign exchange reserves, an increase in foreign exchange holdings, a passive increase in domestic money supply, and increased inflationary pressure, which has led to more serious inflation. .

So, how can we effectively manage foreign exchange reserves?The management and operation of foreign exchange reserves by governments of various countries generally follow the three principles of safety, liquidity and profitability.

1.Safety means that foreign exchange reserves should be deposited in politically stable and economically powerful countries and banks with high reputation, and always pay attention to the political and business trends of these countries and banks; choose currencies with low risk and relatively stable currency values, and pay close attention to them. The balance of payments and economic conditions of these currency-issuing countries, forecast the trend of exchange rates, adjust the currency structure in time, reduce exchange rate and interest rate risks; also choose relatively safe credit instruments, such as national bonds with high reputation, or guaranteed by the state agency bonds, etc.

2.Liquidity refers to ensuring that foreign exchange reserves can be cashed and used for payment at any time, so that cash can be realized at the lowest cost.When arranging foreign exchange assets, countries should consider dealing with emergencies and rationally arrange investment term portfolios based on their own forecasts of foreign exchange receipts and payments within a certain period of time.

3.Profitability means that under the premise of ensuring safety and liquidity, through the analysis and prediction of market trends, scientific investment portfolios are determined, market opportunities are seized, asset investment and transactions are made, and the value of reserve assets is increased.

However, security, liquidity and profitability cannot be fully achieved at the same time.Generally, only high risks can lead to high returns. Assets with high profits must have poor security, while assets with high security and liquidity must have low profits.Therefore, countries often have their own priorities when operating foreign exchange reserves.For example, rich countries pay more attention to liquidity, so as to intervene in the foreign exchange market or use it for external payments at any time, while small countries and countries with poor resources pay more attention to value appreciation and wealth accumulation.Generally speaking, these three principles should be taken into account as much as possible, the strategy of investment portfolio should be adopted, "not putting all eggs in one basket", and the diversification of foreign exchange reserves should be implemented to reduce risks and realize value-added.

[links to related words]

The specific form of foreign exchange reserves The specific form of foreign exchange reserves is the government's short-term foreign deposits or other means of payment that can be cashed abroad, such as foreign securities, foreign bank checks, promissory notes, and foreign currency drafts.It is mainly used to settle the balance of payments deficit and to intervene in the foreign exchange market to maintain the exchange rate of the domestic currency.

(End of this chapter)