Author: Wu Source: Oriental Morning Post

The risks and challenges faced by China's finance are unprecedented, both at home and abroad. Facing the 700 billion US dollars foreign exchange reserve and its increment, we should seriously think about whether there will be some troubles hidden in it.

According to the latest statistics released by the People's Bank of China on July 5th, the balance of China's foreign exchange reserves was 7 1 1 billion dollars by the end of June, up 5 1. 1% year-on-year. Experts said that China's abundant foreign exchange reserves is a "neutral" news, not particularly good but not particularly bad. The key to foreign exchange reserves is not how much, but whether it is effective. ("China's foreign exchange reserves exceed 700 billion US dollars, which may surpass Japan by the end of the year", China News Network, July 2005 15)

Some experts believe that "there is food in your hand, so don't panic". China is under great pressure to reform its own financial system and guard against external risks, so it should be appropriate to have relatively abundant foreign exchange reserves. But in my opinion, this view is debatable. The risks and challenges faced by China's finance are unprecedented, both at home and abroad. Faced with this $700 billion somewhat suspicious foreign exchange reserve and its increment, our financial officials should seriously think about whether there will be some troubles hidden in it.

How to treat the rapid growth of foreign exchange reserves

So, how should we understand this $700 billion foreign exchange reserve and its abnormal growth rate? Is China's foreign exchange reserves "neutral" as some experts say? In my opinion, this $700 billion foreign exchange reserve is a suspicious money, an untimely money and a disturbing money!

There is no doubt that the 700 billion dollar foreign exchange reserve and its abnormal foreign exchange increase are mysterious.

First, the increase in foreign exchange reserves is very suspicious. Statistics show that in the first half of this year, the balance of China's foreign exchange reserves reached 7 1 1 billion US dollars, up 5 1. 1% year-on-year. By the end of June 2005, foreign exchange reserves had increased by 1, 0 1 billion US dollars, an increase of 33.7 billion US dollars year-on-year, while the national foreign exchange reserves were only 470.6 billion US dollars. At the end of 2004, the balance of China's foreign exchange reserves exceeded $600 billion for the first time, reaching $609.9 billion. This growth rate is one of the highest growth records in history, because it is on the basis of last year's high base. In this regard, I agree with Xiao Zhao's analysis of SASAC Research Center. About 40% increase in foreign exchange is difficult to explain. Such a large amount of unexplained foreign exchange is not terrible. In my opinion, the money on the books is not necessarily my own money. Judging from the economic events disclosed in recent years, the current financial management methods are also being renovated in a fancy way, which may be full of articles based on the money in their accounts. It's even possible to sneak in for another tree.

Second, China's foreign exchange reserves suddenly rose sharply, and the timing was also very delicate. A question worth thinking about is, is the growth of our foreign exchange reserves caused by the increase of foreign exchange earned by industry during this period, or by the increase of foreign investment during this period, or by other internationally recognized legitimate channels? Actually, neither, at least there is no data to show that it is. But in terms of time, it just echoes the reversal of RMB appreciation. This coincidence can't help but make people think?

Third, there are some very abnormal phenomena in the international economic game. First, the US Senate, which is crazy about pushing China's RMB appreciation, suddenly shelved the RMB appreciation bill; At the same time, the super heavyweight Federal Reserve Chairman Ben alan greenspan and Treasury Secretary Si Nuo testified against forcing the RMB to appreciate. Then, if the recent meeting of the Group of Eight (G8) has nothing to do with the appreciation of the RMB, its communiqué did not mention the RMB exchange rate. At that time, the domestic financial community breathed a sigh of relief, and people seemed to see the appreciation of the renminbi drifting away like a ghost. At this time, someone even whispered proudly. Of course, there are also keen observers who remind people not to relax their vigilance, but they are ridiculed as making noise. Can the question be that simple? Behind the extraordinary appearance, there are often extraordinary reasons. One possible reason is that the game of RMB appreciation has quietly entered a new realm: big moves are quiet. In times of peace, our financial system is not safe.

Pay attention to the uneasy factors in the financial situation

Although the public opinion of RMB appreciation has a long history, its sudden pressure coincides with the rise of real estate prices in China. This is the new routine of China, an international hot money maker: he recently entered the housing market to speculate on real estate and wait for an opportunity to bet on RMB appreciation. According to related reports, after international hot money entered China, a large amount of funds participated in the speculation of China real estate. According to the data of the National Bureau of Statistics, the national housing sales price in 2004 was 9.7% higher than that in 2003. According to the investigation by the National Development and Reform Commission and the National Bureau of Statistics, in the first quarter of 2005, the real estate prices in 35 large and medium-sized cities continued to rise, and the average selling price of houses rose by 9.8%. This situation is not entirely caused by domestic demand, but rather by international hot money. It is believed that about $8 billion of overseas hot money was invested in Shanghai real estate market in 2004. In the first quarter of this year, overseas hot money accounted for 40% of the transaction volume of commercial housing in Shanghai. According to the statistics of Shanghai Branch of the People's Bank of China, the proportion of overseas funds directly flowing into the Shanghai real estate market was 16. 1% in 2006+0, rising to 23.5% in 2002, exceeding 25% in 2003 and rising from 1 to 1 in 2004. Hot money does not seem to have withdrawn from the real estate market in China as some experts estimated.

We will never oppose reasonable foreign exchange reserves, but the more the better. Don't China people just work hard and try their best to improve their comprehensive national strength? The amount of foreign exchange reserves is an important indicator. However, if the money is fishy, can it still "play a role" normally?

(The author is a researcher and professor at Henan Academy of Social Sciences.)

Reflections on the appropriateness of China's foreign exchange reserves

Guo Huawei Deng Kangxiang

By the end of 2004, China's foreign exchange reserves exceeded the $600 billion mark, reaching $609.9 billion. At present and in the future, the factors that promote the increase of China's foreign exchange reserves will continue to exist, and if there is no policy adjustment, China's foreign exchange reserves will further increase.

First, the negative impact of the extraordinary growth of foreign exchange reserves

As a symbol of a country's economic and financial strength, foreign exchange reserves are the material basis for making up its balance of payments deficit, stabilizing its exchange rate and maintaining its international reputation. For developing countries, it is often necessary to maintain foreign exchange reserves above the conventional level. However, the more foreign exchange reserves, the better. In recent years, the rapid expansion of China's foreign exchange reserves has had many negative effects on economic development.

1, which damages the potential of 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 a country's economic growth. If the extraordinary growth of China's foreign exchange reserves continues, it will damage the potential of China's economic growth.

2. It has brought great price difference loss. According to conservative estimates, based on the difference of 2% between the investment profit rate and the foreign exchange reserve yield, China's current foreign exchange reserve of 609.9 billion US dollars loses more than 654.38+000 billion US dollars every year. If the risk of exchange rate changes is taken into account, this potential loss will be even greater. As we all know, about 70% of China's foreign exchange reserves are US dollar assets. According to some American economists, the dollar may depreciate by 20% to 40% in this crisis. If so, China's dollar reserves will shrink by 85.4 billion to 654.38+070.8 billion.

3. The opportunity cost is greatly lost. China will introduce about 50 billion US dollars of foreign capital every year, so the state will provide many tax incentives; At the same time, China holds about $600 billion in foreign exchange reserves, which are idle. In this way, on the one hand, the state's fiscal revenue is reduced, on the other hand, the people are frugal and lend money to foreigners, and its 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 to buy back foreign exchange funds, so with the growth of foreign exchange reserves, the amount of foreign exchange has been increasing. The rapid growth of foreign exchange not only restricts the effectiveness of macro-control since 2004, but also weakens the effect of macro-control structurally, further increasing the pressure of RMB appreciation, making the central bank's space for regulating monetary policy smaller and smaller.

5, affect the use of international preferential loans. Excessive foreign exchange reserves will make China lose the preferential loans from the International Monetary Fund. According to the regulations of the IMF, countries with sufficient foreign exchange reserves can not only enjoy preferential and low-interest loans from the IMF, but also provide assistance to other member countries with balance of payments difficulties when necessary. This is a waste for our country.

Second, the appropriate scale of China's foreign exchange reserves.

In recent years, China's foreign exchange demand mainly comes from the following five aspects: maintaining normal import demand; Foreign exchange demand for debt repayment; Foreign direct investment returns foreign exchange demand; The government intervenes in foreign exchange demand and other foreign exchange needs (including residents' overseas travel, study abroad, medical treatment, etc.). If the foreign exchange demand in these five areas can be met or slightly saved, then we think the scale of foreign exchange reserves is moderate. China's import foreign exchange demand is about1120-168 billion US dollars. The foreign exchange demand for debt repayment is about $23-34.5 billion. The foreign exchange demand for profit return from foreign investment is about $44.8-67.2 billion. At present, the RMB is not freely convertible. China strictly controls the capital account and implements the system of bank settlement and sale of foreign exchange under current account. So there is no need to interfere with the market because there are too many foreign exchange reserves. We might as well take the short-term capital flowing into China in 2004 as a reference figure for foreign exchange demand. With the further relaxation of the state's restrictions on residents' traveling abroad, visiting relatives, seeking medical treatment and studying abroad, the required foreign exchange reserves will further increase, with an estimated total of 40-60 billion US dollars.

Therefore, the moderate scale range of China's foreign exchange reserves is roughly: 279.8-389.7 billion US dollars. It can be seen that there is a large surplus in China's foreign exchange reserves at present. Therefore, how to control the extraordinary growth of foreign exchange reserves, strengthen the management of foreign exchange reserves and improve the efficiency of the use of reserve assets has become a top priority.

Third, strengthen the management of foreign exchange reserves.

Excessive foreign exchange reserves mean a huge waste of economic resources, which is harmful to China's economic development in the long run. We believe that under the current conditions, strengthening the management of China's foreign exchange reserves should start from two aspects: on the one hand, measures should be taken to solve the problem of extraordinary growth of foreign exchange reserves, on the other hand, the efficiency of the use of existing reserve assets should be improved, and both cannot be neglected.

Controlling the extraordinary growth of foreign exchange reserves can start with the supply mechanism. From the supply point of view, the increase of foreign exchange reserves is the result of the balance of payments surplus and the current foreign exchange settlement and sale system. However, the fundamental reason lies in the expectation of RMB exchange rate appreciation, the excessive interest rate gap between local currency and foreign currency, and the lack of safe, stable and high-return investment channels between local currency and foreign currency. Therefore, enterprises, banks and individuals are willing to reduce their foreign currency assets and increase their RMB assets. Therefore, to solve the problem, it is necessary to dispel the expectation of exchange rate appreciation, solve the interest rate gap and increase investment channels. Of course, we should also study the adjustment of the exchange rate system, change the current exchange rate mechanism of single peg to the US dollar, and establish an exchange rate system suitable for China's national conditions.

1. Change the monetary structure and keep the reserve assets diversified. At present, the outstanding risk of China's foreign exchange assets is that the US dollar is dominant. Therefore, when the US dollar depreciates, we face greater risk of asset shrinkage. We can consider appropriately increasing the proportion of international currencies such as euro and Japanese yen in China's reserve assets.

2. Improve the utilization efficiency of China's foreign exchange reserves. If we can consider using part of the reserve assets to issue US dollar bonds, we can allow enterprises and individuals to buy in RMB and set up special funds. At the same time, we can consider developing the domestic foreign currency bond market. In order to reduce raising funds in the international market and replace some foreign direct investment.

3. Adjust strategy of foreign exchange's reserve investment to increase income. At present, China's foreign exchange assets are mainly used to buy short-term investments such as US Treasury bonds, with an annual yield of only about 3%. We can appropriately adjust the investment term structure and make use of foreign exchange reserves for some long-term investment planning.

Source: Economic Information Daily