Pressures of forex excess

China needs foreign reserves up to a certain level to have enough funds at its disposal to conduct international transactions and deal with potential risks. But its excessive foreign reserves are like an unendurable burden, which can affect its normal economic operations. Thankfully, China has realized the challenges that its massive foreign reserves pose and taken some measures to lessen the risks. The measures include the establishment of a special outward investment company to maintain and increase the value of its reserve assets. Nevertheless, some overseas investments made by China Investment Corporation have failed to yield the expected results, and even incurred heavy losses, because of miscalculations.

China's foreign reserves have ballooned because the renminbi is still not used as an international currency. Once the renminbi is recognized as an international currency, China will not have to hold huge foreign reserves to facilitate its foreign trade. This highlights the need for China to accelerate the process of the renminbi's internationalization in order to reduce its burgeoning demand for foreign exchange to conduct foreign trade and thus ease the foreign reserve pressure.

Following the global financial crisis, China realized the negative effects of its massive foreign reserves and has taken some rudimentary steps to internationalize the renminbi. The reform of the renminbi's exchange rate regime, the bilateral currency swap deals and experimental renminbi-denominated trade settlements with some countries, as well as the adoption of RQFII (Renminbi Qualified Foreign Institutional Investors) have considerably increased the renminbi's influence in the international market. Thanks to China's rising economic and strategic strength and its growing status in the international community, an increasing number of countries have come to accept the renminbi as a medium of exchange, facilitating its internationalization.

The internationalization of the renminbi, however, is a long process in which grappling with the dollar, euro and the yen is unavoidable. And since the renminbi cannot be internationalized in the near future, China has to continue to depend on the dollar and other foreign currencies for its foreign trade. This means the pressure created by its growing foreign reserves on the economy will not ease in the foreseeable future.

Therefore, aside from taking strong measures for the renminbi's internationalization, China should also try to find ways to ease the foreign reserve pressure in the short run. For example, it should consider using its foreign reserves to import some resources and consumer commodities, a move that could also help reduce trade frictions with other countries because of China's rising trade surplus.

The author is a Shanghai-based economics commentator.