Forex reserves need effective management
By Yi Xianrong (China Daily)Updated: 2006-11-28 09:59
More importantly, as China holds a colossal amount of foreign exchange
reserves, any changes in the structure and quantity of the reserves would cause
fluctuations in the international financial market, which in return would have a
direct or indirect impact on the management and value of China's reserves. As a
result, regulators must be cautious.
The United States remains the
world's superpower and the long-term strength and security of the US dollar is
hardly disputable. In this situation, it is better for China to continue to hold
the dollar as its primary reserve asset.
It has been argued that part of
the large pool of reserves can be used to push domestic reforms and upgrade
industrial structure. For example, the State has used foreign exchange reserves
to inject billions of dollars worth of capital into State banks since the end of
2003.
Admittedly it is an innovative option and has achieved some results
as those banks have had their corporate governance improved to varying degrees.
But it should be seen as a special case and should not be applied to other
banks. Otherwise it will incur the problem of "moral hazard."
A
diversified mode of investment is the ultimate way out for the excessive
accumulation of reserves.
It is most important, of course, to keep the
renminbi stable to reduce expectations of renminbi revaluation and stall
speculation. In this way, the reserves would gradually scale
down.
Meanwhile, a smooth channel should be created to ease the legal
flow of currencies across the border so that excessive domestic capital can be
diverted into the international markets. This will lead to a natural shrinking
of the reserves.
It is fair to say that the large stockpile of foreign
exchange reserves is a sign of China's powerful economy. We should not worry
about its sheer scale, but figure out how to effectively manage the reserves to
increase their value.
 | 1 | 2 | 3 |
(For more biz stories, please visit Industry Updates)