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Wiley InterScience | ||||||||||||
  China & World EconomyVolume 15 Issue 1, Pages 14 - 25 Published Online: 5 Feb 2007 © 2010 Institute of World Economics and Politics, Chinese Academy of Social Sciences
Abstract | References | Full Text: PDF (Size: 106K) | Related Articles | Citation Tracking  China's Rapid Accumulation of Foreign Exchange Reserves and Its Policy Implications The authors are grateful to Richard Pascoe, David Harvey, Mark Roberts and other colleagues at the China Policy Institute and the School of Economics for their valuable comments. Copyright The official journal of The Institute of World Economics and Politics, Chinese Academy of Social Sciences (CASS) 2007 KEYWORDS capital control • financial liberalization • foreign exchange reserve • managed float Abstract
In late February 2006, China surpassed Japan to become the world's largest holder of foreign exchange reserves. Beijing is now faced with the growing challenge of how to handle these vast reserves effectively. Although China's soaring foreign exchange reserves indicate that its overall strength has grown, they have created internal and external pressures on the balance of the economy, and introduced risks to the financial system. It is estimated in the present study that foreign exchange reserves of approximately US$ 400bn in 2005 would have been appropriate under circumstances of a managed floating exchange rate regime and capital control. China's actual reserves have far exceeded its normal demand. The objective of China is to maintain an optimal level that maximizes net benefits as a whole. Four main policy options are available for China to achieve its target: spending and investing foreign exchange reserves, gradual liberalization of the capital account, diversification of foreign exchange reserves and a switch in holders of foreign exchange reserves. Spending and investing in foreign exchange reserves can be undertaken in combination with liberalization in the capital account, given careful consideration of the risks involved. Liberalization should be extensive but gradual so that companies and individuals can adjust to changes in financial markets and manage portfolios while avoiding unnecessary risks. (Edited by Xiaoming Feng) | 
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