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Disputes arise over use of China's forex reserves(2)

2011-10-11 11:11    Ecns.cn     Web Editor: Wang Fan
In June 2011, China's foreign exchange reserves hit nearly $3.2 trillion.

In June 2011, China's foreign exchange reserves hit nearly $3.2 trillion.

Are forex reserves citizens' money?

According to Zhang Bin, a researcher at the Institute of World Economics and Politics of the CASS, the central bank buys foreign exchange assets through issuing currency, achieving almost pure profit or "seignorage."

The more currency it issues, the greater depreciation there will be for citizens' money. According to this logic, the foreign exchange reserves belong to the public, and should be used to serve their interests just like tax revenue.

Guo Tianyong, a professor at the Central University of Finance and Economics, pointed out that foreign exchange reserves are the results of the crystallization and solidification of a country's economic growth.

As the GDP is comprised of private consumption, gross investment and net exports, only consumption and investment benefit the citizens, while net exports create the foreign exchange reserves. In this sense, such reserves are the common wealth of the general public.

Disputes over how to make use of reserves

Since the rapid increase in reserves may lead to excessive liquidity and exert significant sterilization pressure, many scholars suggest that the government should diversify the nation's reserves through different ways.

According to economist Zhang Weiying, the foreign exchange reserves should be divided into two halves, with one half distributed to the citizens. For example, the government should give its U.S. Treasury bonds to the citizens and let them be the real holders as individuals.

This viewpoint is supported by Gu Jianguang, director of the administration for the School of International and Public Affairs at Shanghai Jiaotong University, who compared the situation of Japan's foreign exchange reserves with China's. Gu said foreign exchange reserves in the hands of Japanese citizens far exceed those of the government and, through private investment, help dilute devaluation of reserves.

However, Zhang Bin does not agree with this approach. First of all, he believes it will involve complicated procedures if the reserves are distributed directly. Most importantly, however, Zhang said this may cause an increased risk of higher inflation.

Zheng Bingwen, a renowned Chinese expert on pensions, and director of the Institute of Latin American Studies at the CASS, came up with another suggestion. He said China should make use of part of its foreign exchange reserves to set up sovereign wealth funds (SWFs) and pension funds. Zheng mentioned that countries such as Russia and Norway have long established SWFs. For example, Russia established its National Welfare Fund with export revenue in 2008.

Zhang Bin also supports this, but pointed out that there should be a new administrative organization to manage the program, not the State Administration of Foreign Exchange.

Generally speaking, the government must strike the right balance with its policies to diversify reserves through investment, while maximizing profits on the excess in order to serve the public.