Huge forex reserves arouse debate

Updated: 2006-10-29 19:06

BEIJING -- China's foreign exchange reserves will further to hit the 1 trillion US dollar barrier at the end of October or early November, experts have predicted, triggering discussion across the country.

China's foreign exchange reserves will burst the 1 trillion U.S. dollar barrier at the end of October or early November, experts have predicted. [AFP]

The People's Bank of China, or central bank, announced two weeks ago that China held 987.9 billion U.S. dollars of foreign exchange reserves at the end of September, up 28.46 percent year-on-year. The country's foreign exchange reserves rose by 18.77 billion U.S. dollars monthly in the first nine months this year.

The central bank will make a new announcement about China's foreign exchange reserves in January 2007. However, insiders said that there is no doubt that China's foreign exchange reserves will reach 1 trillion U.S. dollars very soon.

China overtook Japan as the world's largest holder of foreign exchange reserves in February.

Experts say that burgeoning foreign exchange reserves reflect China's growing strength, but warn that a high level of foreign exchange reserves also has a downside.

The country's hefty foreign exchange reserves make its fast economic development more risky, said Fan Gang, a member of the monetary policy committee under the People's Bank of China.

He said that the economy is showing signs of cooling down, with overheating being reined in as a result of macro-control measures. However, mounting foreign exchange reserves and excessive trade surpluses will create risks for the healthy growth of the economy.

He said that massive capital inflows from overseas are not seeking to speculate on the RMB, as many people believe, but instead eyeing business opportunities created by the booming economy.

The very modest RMB fluctuation band gives speculators little room to rake in profits. China's buoyant economic prospects are what investors really value, he said.

Zhong Wei, professor with the finance research center of Beijing Teachers' University, said hefty foreign exchange reserves require a brand-new management system in China.

Zhong suggested that China fix foreign exchange reserves at a level of no more than 800 billion U.S. dollars and allocate the rest to useful purposes.

Zhong said the surplus reserves could be used to purchase strategic materials for China's economic development, to upgrade technologies in state-owned enterprises and to reform the state-owned financial sector. The extra foreign exchange reserves could also be used to introduce talented people from overseas and to boost the nation's social security fund, Zhong said.

The State Administration of Foreign Exchange, which has paid close attention to the increase in foreign exchange reserves, says maintaining a balance between international income and expenses is one of the major tasks for China's economic and social development.

The administration is considering taking measures to slow down the increase in foreign exchange reserves.

The management of foreign exchange reserves will be improved so that they can be used as effectively as possible, according to the administration.