China’s colossal forex reserves arouse debate

Beijing, October 30:

China’s foreign exchange reserves will burst the $1 trillion barrier at the end of October or early November, experts have predicted, triggering discussion across the country. The People’s Bank of China, the central bank, announced two weeks ago that China held $987.9 billion of foreign exchange reserves at the end of September, up by 28.46 per cent year-on-year. The country’s foreign exchange reserves rose by $18.77 billion monthly in the first nine months this year.

The central bank will make a new announcement about China’s foreign exchange reserves in January 2007. However, insiders said there is no doubt that China’s foreign exchange reserves will reach $1 trillion very soon. China overtook Japan as the world’s largest holder of foreign exchange reserves in February. Experts say that burgeoning foreign exchange reserves reflect China’s growing strength, but warn that a high level of foreign exchange reserves also has a downside.

The country’s hefty foreign exchange reserves make its fast economic development more risky, said Fan Gang, a member of the monetary policy committee under the People’s Bank of China. He said the economy is showing signs of cooling down, with overheating being reined in as a result of macro-control measures.

However, mounting foreign exchange reserves and excessive trade surpluses will create risks for the healthy growth of the economy. Zhong Wei, professor with the finance research centre of Beijing Teachers’ University, said hefty foreign exchange reserves require a brand-new management system in China. Zhong suggested that China fix foreign exchange reserves at a level of no more than $800 billion and allocate the rest to useful purposes. He said the surplus reserves could be used to purchase strategic materials for China’s economic development, to upgrade technologies in state-owned enterprises and to reform the state-owned financial sector. The extra foreign exchange reserves could also be used to introduce talented people from overseas and to boost the nation’s social security fund, Zhong said.

The State Administration of Foreign Exchange, which has paid close attention to the increase in foreign exchange reserves, says maintaining a balance between international income and expenses is one of the major tasks for China’s economic and social development. The administration is considering taking measures to slow down the increase in foreign exchange reserves.