Allowing Chinese businesses to hold more foreign currency is a desirable move. It can both help raise their awareness of the currency risk and facilitate their overseas expansion.
However, allowing individuals to buy more forex from banks for such purposes as overseas travel and studies will not be so helpful in easing the pressure a fast-growing surplus in the country's international balance of payments brings about.
On Wednesday, the yuan rose to its highest level against the US dollar since the Chinese currency was revalued last July, with the US dollar closing at less than 100 basic points from the 8.00-yuan psychological threshold.
On the same day, a deputy governor of the People's Bank of China revealed a policy shift from stockpiling foreign exchange reserves in State coffers to leave more of them at the hands of enterprises and individuals. Such a policy adjustment could represent a stopgap response by the central bank to the confirmed reporting that the country's official reserves reached US$853.6 billion by the end of February. That news means China might have overtaken Japan as the biggest holder of foreign exchange reserves.
Thanks to policies encouraging foreign direct investment and exports, as well as a forex administration regime that controls outflows but welcomes inflows, China's forex reserves have increased rapidly, forcing the central bank to buy excess dollars with more and more local currency.
The situation has invited harsh but hold-no-water criticism by some US politicians. They mistakenly insisted that China's exchange rate was to blame for the United States' record current-account deficit.
It is important for China to reduce external pressure unfairly imposed on its currency. Yet, of equal importance is to deal with the mounting pressure so much forex reserves put on the domestic monetary policy.
It is wise to make use of domestic demand for foreign exchange to absorb the excess liquidity in the forex market.
With more foreign currency, domestic companies can be financially better equipped to invest abroad or trade globally.
But without substantial improvement in domestic consumption and investment policies, it is unlikely that the individuals will be persuaded to buy more forex from banks, especially as yuan rises steadily against foreign currencies.
Even if they spend more on overseas travel and studies, the sum of forex they need can hardly mount to any significant change in the country's swelling forex reserves that is expected to exceed US$1 trillion.
Hence, if the central bank is serious about having more forex reserves held by the people, it has to do more with domestic consumption and investment environment.
(China Daily 04/07/2006 page4)
