What consequences huge China’s forex reserves may have?
Last month China announced that its forex reserves overcame the point of $1.8 trillion. This was even higher than the forex reserves of the Japan in 2006. Such high numbers of foreign exchange reserves shows only that the country possessing it is able to pay other countries for products and debts. But in the current situation China doesn’t even own the biggest part of the reserves.
Here is the explanation of this situation. The companies in China sell their products all over the world and those who purchase them have to pay in USD. But the USD is not widely used in China therefore China companies have to exchange dollars into renminbi (RMB) and they can do it only in state-owned banks. Thus the dollars turn into the part of national forex reserve. Thereafter the greater Chinese export becomes the more dollars become the part of China foreign exchange reserve.
Due to Chinese analysts over 30 percent of the current forex reserves were saved up after the year 2003. And more than a half o this 30 percent is nothing but an inflow of capital. Actually China doesn’t own this money. During the last 2 years Chinese exports were decreasing but the forex reserves were still growing. Therefore it is clear that the biggest part of them is gained due to speculative investments and not trading operations.
However speculative investments are quite risky for the whole economy. In case the economy is heated than the money come into real estate and stock markets contributing to the irrational growth of the prices. After the economy turns to the decrease period the speculative investments disappear.
So coming back to our situation. Having got the more dollars Chinese Central Bank is to issue more RMB. This action will contribute to the growth of the local capital amount; decrease the RMB purchasing power and finally lead to the inflation trends growth. To avoid this Central bank may issue short-term bill instead of RMB for the banks operating with foreign currencies or make the reserve bank ratio bigger.
Big forex reserves may also be used for imports, with the aim to increase resources or otherwise invested. Moreover the decreased purchasing power of the USD contributed to the decreased Chinese forex reserves in the world market.
Thus, even the attempts of the Chinese authorities to decrease speculative investments were not effective and make us suppose that the current situation will not change in the nearest future.
