In order to increase foreign exchange, it is necessary to issue domestic currency to buy the money supply of the authorities, which may cause currency inflation in the domestic market. A certain foreign exchange reserve is an important means for a country to adjust its economy and achieve economic balance at home and abroad. When there is a deficit in the balance of payments (the domestic market is full of foreign goods, resulting in a tight domestic currency), the use of foreign exchange reserves can promote the balance of payments. The balance of payments deficit will lead to the decrease of foreign exchange supply and the increase of domestic foreign exchange market demand, which will increase the foreign exchange rate and decrease the local currency exchange rate. If the government takes measures to intervene, that is, selling foreign currency and buying local currency, the government must have sufficient foreign exchange reserves, which will further lead to the depreciation of the local currency. Government intervention will directly lead to the reduction of domestic money supply, and the reduction of money supply will lead to the increase of domestic interest rates, leading to economic decline and increased unemployment.
Foreign exchange reserves are characterized by holding a financial creditor's right expressed in foreign currency, rather than putting it into domestic production and use. This leads to the problem of opportunity cost, that is, if the monetary authorities do not hold reserves, they can use these reserve assets to import goods and services and increase the actual resources for production, thus increasing employment and national income, while holding reserves will give up this interest.
The increase of foreign exchange reserves should correspondingly expand the money supply. If there are too many foreign exchange reserves, it will increase the pressure of inflation and increase the difficulty of monetary policy.
But when it appears between enterprises, the situation is different.
Since 1994, China has implemented the system of bank settlement and sale of foreign exchange. In addition to foreign exchange held by overseas legal persons and natural persons, cash accounts can be opened in designated banks, and the foreign exchange income of domestic enterprises and institutions must be sold to designated banks according to the foreign exchange quotation of the day. Due to the limitation of foreign exchange positions, designated foreign exchange banks must sell their surplus positions in the foreign exchange market. The central bank is the only market maker in the inter-bank foreign exchange market. For example, if you are a business owner, your income from exporting products to the United States this year is $65,438+0,000, but in China, dollars cannot be directly used for payment. You must convert this 1 000 USD into RMB, which means that the country will use RMB to buy the USD you earned, so that your USD profit will become RMB, and the USD you earned will become the foreign exchange reserve of the country.
In the process of "buying" foreign exchange from enterprises, the state uses the base currency, and accordingly increases the investment of the base currency.