Should forex reserves be handed out?

Zhang Weiying, a leading economics professor at Peking University, dropped a bombshell at a recent forum by advocating that part of China's foreign currency reserves be given away to the public in order to stimulate domestic demand and keep more of the nation's wealth in the hands of the people. Those who oppose his radical idea claimed the reserves will be better managed if they remain under State control. Should the reserves be handed out to the public?

Yes

Zhang Weiying, Peking University economics professor:

China has too much wealth under government control. China should make use of the global financial crisis to reform such wealth distribution. Perhaps some of the stocks of State-controlled companies should be shared among the public. The assets of State-controlled companies amount to 15 trillion yuan, with the government holding about 70-80 percent. If China takes out 40 percent of that, or 6 trillion yuan, and gives the money to the public, their wealth would increase and they would have more to spend to stimulate domestic demand and the government would retain control of its State assets.

China has nearly $2 trillion in foreign exchange reserves, some of which is in US treasuries. Chinese individuals could hold US treasuries. If the government transfers part of its holdings of US treasuries to the public, it would create a great "wealth effect", encouraging people to spend rather than to save.

Sheng Dalin, commentator with Henan-based Orient Today:

Zhang's idea may be thought radical by some but others agree. In an online survey, 2,188 respondents out of 2,779 surveyed agreed with Zhang. Giving part of the country's reserves to the public would reduce the State's control over its reserve assets. But centralized management of the reserves has defects. It can incur great losses if wrong decisions are made. In recent years, for example, China's huge holdings of US treasuries have contracted in value.

Zhang suggested giving half of the country's forex reserves, so the government would still manage about $1 trillion. Such a reserve would be enough to ensure China's influence in the international community. A potential problem is that once the wealth is distributed to the public, people might keep the money in banks instead of spending it. My suggestion is that the country gives part of the reserves to the public while also distributing some of the money to replenish the social security fund. The public would spend more thanks to both their increased wealth and expanded social security guarantee.

No

Gao Xiqing, general manager of China Investment Corporation:

It would be troublesome for China to distribute part of its foreign exchange reserves to the public. America would certainly oppose such a plan.

Whenever China adjusts its foreign exchange reserve pool, the US gets nervous that such adjustments might shake market confidence and affect the interests of both countries.

If the government gives part of its foreign exchange reserves to the public, ordinary workers and farmers would deposit the money in banks. They would not use the money to buy anything, which will do nothing to stimulate economic growth.

Wang Wei, independent commentator:

Giving part of the reserves to the public would have adverse effects. People would have to convert the dollar-denominated reserve money into renminbi if they want to use the money for consumption. If they convert the dollar into renminbi by selling it to the government, it would be the same as the government issuing extra renminbi currency, which will spur liquidity and inflation.

If people sell dollars to businesses or individuals, it would lead to a selling spree, which will make the value of dollar in the domestic market fluctuate drastically and invite currency speculation.

If $1 trillion worth of reserves flowed into the domestic market, it would create huge demand for renminbi and lead to serious inflation. If inflation occurred too quickly, it would offset the consumption-encouraging effect of the reserve-sharing plan.

The foreign exchange reserves guarantee the country's financial stability. Some countries, due to their lack of adequate reserves, have fallen victims to the global financial crisis, which should sound an alarm for China. If part of China's reserves is given to the public, it may compromise the country's ability to counter the impacts of the deepening financial crisis.

(China Daily 03/02/2009 page2)