Forex reserves need effective management
By Yi Xianrong (China Daily)Updated: 2006-11-28 09:59
As a large economy, China may experience something that seems unusual to
other countries. No other countries have piled up so much in foreign exchange
reserves, but it does not mean that a stockpile of such magnitude will become
unaffordable for China.
What needs to be clarified now is which part of
the reserves is normal trade surplus and which part is "hot money" that has
flowed into China to take advantage of the defects of China's foreign exchange
regime to speculate on the revaluation of the renminbi.
If such loopholes
are found, foreign exchange regulators should seriously review the current
regime to deal with the loopholes and prevent foreign capital from entering the
country to push the revaluation of the renminbi.
What really counts is
how to effectively manage foreign exchange reserves. Its scale does not
matter.
Few would deny that "using money to make money" is the best and
fastest way to accumulate wealth. If managers of the reserves can find proper
investment channels, it would be more possible that the reserves would
appreciate.
Technically, the cost of the reserves can be measured by the
interest rate of the renminbi, while the returns can be measured by the interest
rate of foreign exchange currencies. The interest rate of US treasury bonds that
China holds is 5 per cent, while the base interest rate of the renminbi is 2.52
per cent. Given the interest rate gap it is worth holding foreign exchange
reserves, whose rate of return is higher than the general rate of domestic
financial markets.
If China can diversify its holdings and investment
instruments, the return rate may be higher than that of US treasury
bonds.
There are a good number of investment institutions in the
international markets. China needs to make good use of those investors and form
an effective and diversified investment mechanism so that the reserves can
appreciate.
Scholars have put forward a slew of proposals on the
management of the reserves. What is sure is that regulators will choose the best
methods based on their professional knowledge and information to increase the
value of the reserves.
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