Discussion on Foreign Exchange Reserve Management in China
Foreign exchange reserves; Huge reserve risk; Foreign exchange reserve management
As of the first quarter of 2007, China's foreign exchange reserves have exceeded $65,438 +0.2 trillion. How to manage China's huge foreign exchange reserves has become the focus of attention. This paper first clarifies the understanding of foreign exchange reserves, discusses the possible risks and principles of foreign exchange reserve management, and finally puts forward a series of policy suggestions from the perspective of reasonable foreign exchange reserve management and excess foreign exchange reserve management, arguing that it is necessary to increase the gold reserves and material reserves in foreign exchange assets and establish foreign exchange investment companies for diversification.
First, the understanding of foreign exchange reserves.
At present, many scholars or practitioners have put forward a series of suggestions and ideas on how to manage China's huge foreign exchange reserves from various angles, but due to the lack of correct understanding of foreign exchange reserves, some suggestions are not feasible or contradictory. Therefore, it is necessary to correctly understand the connotation of foreign exchange reserves before discussing the management of foreign exchange reserves.
Foreign exchange is the asset of the central bank, and its corresponding liabilities are mainly public or private sector deposits, which means that the increase of foreign exchange also leads to the increase of domestic RMB, so foreign exchange cannot be directly used for domestic consumption and investment, because it is equivalent to increasing the money supply and may lead to inflation.
Foreign exchange is China's creditor's right to foreign countries (mainly trade surplus, not foreign debt). Foreign exchange is equivalent to "bonds" issued abroad. Foreign countries exchange these "bonds" for our products and services. Of course, we can use these bonds to buy back products and services from abroad in the future, but if the bonds depreciate, we will lose money if we buy back less. After the disintegration of the Bretton Woods system, the world entered an international monetary system with floating exchange rates, and holding foreign exchange means taking the risk of exchange rate fluctuations.
Owning foreign exchange is equivalent to contributing to foreign seigniorage. Seigniorage is essentially a kind of compensation for currency issuance and maintaining currency credit. The more money you have in other countries, the greater your contribution to the seigniorage in that country. At present, the dollar is the most important foreign exchange asset, so the United States is the country that benefits the most from the seigniorage.
Foreign exchange reserves are very important for countries with a fixed exchange rate system. Foreign exchange reserve is a necessary measure to ensure the stability of a country's exchange rate system, international trade balance and international settlement and payment. The increase in foreign exchange is mainly composed of trade surplus, borrowing and direct investment. The essence of China's exchange rate system is a floating fixed exchange rate. The central bank manages foreign exchange assets in a unified way, and enterprises need foreign exchange for import, foreign investment, repayment of foreign debts and remittance of profits of foreign-funded enterprises. Therefore, a basic reserve must be guaranteed, otherwise a payment crisis will occur.
Second, the problems caused by huge foreign exchange reserves.
Foreign exchange reserves are very important for stabilizing a country's currency exchange rate system and balancing international trade balance, but the more foreign exchange reserves, the better. Huge foreign exchange reserves will also bring a series of risks and problems.
Huge foreign exchange reserves may face huge exchange rate risks. At present, the main foreign exchange assets in China are US dollar assets. If the US dollar depreciates, the real value of foreign exchange reserves will be greatly reduced. Due to the huge amount of assets, the space for currency adjustment is limited. In the past two years, the dollar has depreciated by about 20% against major currencies, causing tens of billions of dollars in losses.
The increase of foreign exchange reserves will squeeze the space of monetary policy. The increase in foreign exchange accounts correspondingly expands the money supply and increases the pressure of inflation. In order to reduce the impact of high foreign exchange reserves on the domestic price level, the central bank must reduce the money supply by withdrawing cash or raising interest rates, which increases the pressure of local currency appreciation. On the contrary, in order to reduce the pressure of local currency appreciation caused by high foreign exchange reserves, the central bank must increase the money supply by lowering interest rates, thus strengthening inflation. Therefore, the internal and external objectives of the central bank's monetary policy are in conflict.
The high foreign exchange reserves indicate that in the foreign exchange market, the supply of foreign exchange exceeds demand, which may easily lead to the expectation of local currency appreciation. The appreciation of local currency will often reduce the competitiveness of domestic export products, which is not conducive to employment and economic growth; At the same time, the appreciation of local currency leads to the high value of local currency assets, which is easy to form an asset bubble; Further increase the pressure of RMB appreciation, the United States, Japan, Europe and other major trading partners put pressure on the value of RMB with the rapid growth of China's foreign exchange reserves as the main evidence; International speculators take this as the unreasonable basis of RMB exchange rate, and hot money flows into China through various channels, thus increasing the pressure of RMB appreciation.
High foreign exchange reserves require huge opportunity costs. That is to say, if the monetary authorities do not hold reserves, they can use these reserve assets to import goods and services, increase the actual resources of production, and thus increase employment and national income, and holding reserves will give up this interest. In addition, China is a country in urgent need of funds, and it has lent foreign exchange to the United States and other countries at a low interest rate, which did not give full play to the potential of this part of funds.
Three, the main principles of foreign exchange reserve management
Foreign exchange reserves are the product of the current international monetary system and international trade system. In order to reduce exchange rate risk, reduce external shocks and promote the balanced development of domestic economy, foreign exchange reserve management needs to follow certain principles.
Maintain diversified currency reserves to spread the risk of exchange rate changes. According to the principle of "not putting eggs in the same basket", foreign exchange currencies should be diversified. The following principles can be followed: (1) Determine the amount of money in the reserve, term structure and the proportion of various monetary assets according to the needs of imported goods, services or other payments; (2) When choosing the form of reserve currency assets, we should not only consider its rate of return, but also its liquidity, flexibility and security; (3) Pay close attention to the change of currency exchange rate and adjust the proportion of various currencies in time or irregularly.
Maintain a moderate scale of foreign exchange reserves. A certain foreign exchange reserve is an important means for a country to adjust its economy and achieve internal and external balance. When the balance of payments is in deficit, the use of foreign exchange reserves can promote the balance of payments; When the domestic macro-economy is unbalanced, such as when the total demand exceeds the total supply, foreign exchange can be used to organize imports, so as to adjust the relationship between the total supply and the total demand and promote the macro-economic balance; When the exchange rate fluctuates, foreign exchange reserves can be used to intervene in the exchange rate to stabilize it. Therefore, foreign exchange reserves are an indispensable means to achieve economic balance and stability, especially in the case of the continuous development of economic globalization and the continuous strengthening of economic ties among countries. The more foreign exchange reserves, the better. After all, the essence of foreign exchange reserves is to put domestic funds overseas, and holding them has costs and risks. Therefore, it is very important to determine a reasonable scale of foreign exchange reserves for maintaining China's macroeconomic stability.
Diversification of investment channels for surplus foreign exchange reserves. Diversification is to consider the use of foreign exchange from the perspective of national strategy. For surplus foreign exchange reserves, some countries make diversified investments on the premise of "safety", "liquidity" and "profitability". Such as foreign direct investment and reserve important strategic resources. A successful example of diversified investment is Singapore. Singapore's Ministry of Finance, through its wholly-owned holding of Temasek, invested in the world with the capital injected by the government, and the average annual return rate of shareholders reached 18%. Due to the lack of domestic resources, Japan has converted part of its foreign exchange reserves into strategic material reserves. At present, Japan is one of the countries with the richest oil reserves.
Four. Policy Suggestions on Foreign Exchange Reserve Management in China
The management of foreign exchange reserves should have two meanings, one is about the management of foreign exchange reserves within a reasonable scale; The second is the use of foreign exchange assets beyond the needs of foreign exchange reserves. For the former, the main purpose of foreign exchange reserve management is to maintain exchange rate stability and prevent the occurrence of financial crisis, while for the latter, the main purpose of foreign exchange reserve management is to improve the efficiency of the use of foreign exchange funds and realize the appreciation and preservation of foreign exchange assets. Therefore, different measures should be taken to manage China's foreign exchange reserves.
1. Reasonable management of foreign exchange reserves
Pay attention to the safe storage of reserves. At present, most of China's foreign exchange reserves are financial assets expressed in US dollars, Eurobonds and major western currencies. In recent years, the international political and economic turmoil and the potential conflicts between China and neighboring countries and regions may affect the security of China's foreign exchange reserves. This requires strategic consideration and how to choose to store and keep foreign exchange reserve assets from the perspective of safety.
According to the situation at home and abroad, determine the lower and upper limits of foreign exchange reserves and the range of foreign exchange reserves suitable for China's national conditions. According to the development of China's national economy, the degree of opening to the outside world, the international balance of payments and the development goals of macroeconomic policies, a phased reserve adjustment plan is formulated. According to the suggestion of Professor Xia Bin of the State Council Development Research Center, it is more appropriate for China to maintain foreign exchange reserves of more than 700 billion yuan.
According to the principle of "safety, liquidity and profitability", the asset allocation of foreign exchange reserves will be considered in the medium and long term. In the context of the rapid growth of foreign exchange reserves, in addition to national debt, government agency bonds, corporate bonds and international financial organization bonds with high credit ratings are also important aspects of the use of reserve assets in China. Considering that the US dollar still dominates the international monetary system, the US financial market is still the most developed market in the world, and the US is undoubtedly still an important market for China's foreign exchange reserve investment. The adjustment of asset structure should be based on the strategic judgment of the long-term trend of major international currencies, and the adjustment of asset structure must be cautious and gradual, so as not to cause large fluctuations in the international asset market prices, which is not conducive to China's foreign exchange management.
2. Management of excess foreign exchange reserve assets
We can consider setting up a special investment company as the main body of excess foreign exchange assets for commercialization and professional operation. Specifically, it is worth considering the establishment of a "state investment holding company" controlled by the government. As for whether the "state investment holding company" is led by the central bank or the Ministry of Finance, we think it should be the latter. The central bank is the responsible institution of monetary policy, and the management of state-owned financial property should belong to the Ministry of Finance. At the same time, we can also consider handing over part of the reserves to international private investment funds for escrow. In fact, at present, many central banks entrust part of their reserves to one or several funds for custody. These funds are composed of experts' assets in different proportions, and their structures are adjusted according to market changes. Judging from the situation for many years, these funds have achieved high returns.
Increase the diversification of foreign exchange reserves. First, consider increasing the proportion of gold in foreign exchange assets. As a natural currency, gold has a good function of preserving value and can be used as the final international settlement currency. The proportion of gold in China's foreign exchange assets is low, accounting for only 1.5%, while developed countries generally convert foreign exchange reserves into gold reserves. By the end of June, 2005, 5438+ 10, the proportion of gold in foreign exchange reserves of various countries was: 6 1. 1% in the United States, 55.8% in Italy, 55. 1% in France, 5 1% in Germany and 55% in the Netherlands. In addition, China can also consider converting its foreign exchange reserves into asset reserves. At present, China's imports of petroleum, iron ore, manganese ore and chromite have greatly increased, and the cost of utilizing foreign resources has greatly increased. China should convert part of its foreign exchange reserves into asset reserves to reduce the impact of rising international resource prices on China's economy.
Using foreign exchange reserves to build capacity reserves. The real key to sustainable development is not only the ability to own and control resources, but also the strong ability to use and control resources. The improvement of ability can finally solve the resource constraint. The main means of capacity reserve are:
(1) Encourage the strategy of "going out" and support and cultivate China's multinational companies. In the era of globalization, multinational corporations occupy a dominant position in resource allocation. Cultivating multinational companies in China plays an irreplaceable role in improving China's opening-up level and truly becoming a world economic power.
(2) Encourage access to the exploitation rights of important overseas economic resources. With the sustained development of China's economy, China's dependence on overseas economic resources will continue to increase, and it is more reasonable to control the exploitation rights of overseas resources than to import them directly.
(3) Encourage investment in China's strategic foreign infrastructure construction. China's neighboring countries are rich in energy reserves. The construction of cross-border oil and gas pipelines, railways and highways plays an important role in ensuring the safety of resources and energy supply and strengthening the economic and trade relations between China and neighboring countries.
(4) Introduce and cultivate overseas talents. The competition between countries is, in the final analysis, the competition for talents. China should formulate a medium-and long-term overseas talent training plan and send government officials, natural and social science talents, engineering and technical personnel and professionals (accounting, law, consulting, construction, etc.). ) Conduct planned training overseas. At the same time, we can consider setting up R&D institutions overseas to directly utilize overseas local talents.