Foreign reserves and the right to reserve

The debate on how China should use its huge foreign reserves is back in focus after US Treasury Secretary Timothy Geithner's visit to China last week. The visit was part of the two countries' efforts to prepare for the Strategic and Economic Dialogue, to be held in Washington later this summer.

The global financial crisis has prompted the US to adopt an expansive budget and a loose financial policy to check the economy from receding further. Such a policy has caused the world's confidence in the dollar to diminish further, and increased the risk of countries holding US national debts. As a result, economies holding dollar-denominated assets have tried to cut their dollar investments and explore new avenues to change their reserves structure.

An economy has to change the structure of its foreign reserves to adapt to changing political and economic situations at home and abroad. But a reasonable structural adjustment does not mean unprincipled application or misuse of the reserves. No change should blur the fundamental attribute of a country's foreign reserves of representing its "national credit".