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Making the most of forex reserves

(China Daily)
Updated: 2009-02-19 07:46

The steady growth of China's huge foreign exchange reserves surely speaks volumes about the resilience of the Chinese economy even in the face of the worst global financial crisis and economic downturn in many decades.

Related readings:  China sees 1st annual growth slowdown in forex reserve in 10 years  Imports to get forex fund boost  Growth rate of forex reserve falls  China seeks "more active" use of forex reserves

However, to help the world economy as well as itself ride out the current crisis, the country needs to tap into its forex reserves swiftly and smartly.

China's State Administration of Foreign Exchange (SAFE) predicted yesterday that the country's international balance of payments remained "double surplus" in current account and capital account in 2008, but that the growth rate had slowed.

Such an official statement can help clear up skepticism that China has seen large-scale capital flight since its currency stopped rapidly appreciating against the US dollar last year.

Foreign direct investment has fallen for four months in a row, but China still witnessed net capital inflows in January largely thanks to a near-record trade surplus of $39.1 billion.

Obviously, the global crisis has not changed the underlying driving force behind China's economic growth, therefore ruling out any prompt deterioration of the country's international balance of payments.

Nevertheless, while it is generally agreed that the country's growth prospects are to a certain extent anchored by its growing forex reserves of about $2 trillion, debate about the deployment of these reserves has become increasingly intense.

Some people argued that the government should divide a considerable portion of foreign exchange reserves among all the people to raise their income and purchasing power to boost domestic consumption.

Some others insisted that the country should use forex reserves to increase importation of oil and other resources while global commodity prices remain low.

Though all have their own limitations, these suggestions underscore a sense of urgency over the use of the country's vast forex reserves. It indicates that the current way of investing most of them in US treasury bonds is far from satisfactory.

The Chinese government has already made clear its intention to use its foreign reserves more actively and efficiently to boost domestic development amid the global economic crisis.

Utilizing forex reserves to increase imports for domestic consumption and support Chinese enterprises' overseas investment could be a good start.

Of course, to keep the exchange rate of the Chinese currency stable at a reasonable level during this course is necessary for China as well as for the world to effectively tackle the global financial crisis.