Foreign exchange reserves set to surpass US$1 trillion
By Jin Rong (China Daily)
Updated: 2006-10-30 08:28
China's foreign exchange reserves look set to hit the US$1 trillion mark at
the end of this month or beginning of November. But as the figure rises, so does
the debate over how to best manage it.
The reserves, already the world's
biggest, surged to US$987.9 billion at the end of September, largely driven by a
burgeoning foreign trade surplus and massive inflow of foreign direct investment
(FDI).
In the first nine months of the year FDI stood at US$42.59
billion, although this was a 1.52 per cent drop year-on-year.
Reserves
grew on average US$18.8 billion each month from January to September, statistics
from the central bank show.
"How to manage such a huge reserve is a big
challenge," said Yi Xianrong, a research fellow at the Institute of Finance
Research under the Chinese Academy of Social Science.
"The crux of the
problem is that you have to keep the value stable or increasing," Yi
said.
The ballooning foreign reserves, many economist say, is a major
reason behind the loose money supply. This is because the central bank has to
issue additional money to mop up the excess US dollars in the market, resulting
in excessive liquidity in the banking system.
And the fluctuating foreign
exchange rate also poses a huge risk, economists say.
In a bid to
minimize such risks, the central bank should diversify its existing US
dollar-dominated foreign reserves structure, and increase its holdings of euros
or other major international currencies, said Li Yongsen, a finance professor at
Renmin University of China.
The central bank, he said, could also buy
more state bonds issued by other major economies and decrease holdings of US
Treasury bills.
"It's better to spread the risks, and not put all your
eggs in one basket," Li said.
The professor also suggested that the country
might consider using the huge foreign reserves to purchase some strategic
resource reserves such as oil.
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