impacts of China's foreign exchange reserves

Topics: Monetary policy, Currency, Foreign exchange reserves Pages: 16 (3718 words) Published: May 5, 2014
The impacts of China’s foreign exchange
reserves
Difang Deng

February 2014

Abstract
This paper intends to figure out the impact of china’s foreign exchange reserves in both its investment profitability and its influence in domestic economic environment and in the global market followed which is the suggested solution to improve the current situation economically and financially. The structure of the paper is first the introduction and the cause of the China’s large amount of foreign exchange reserves. And secondly the paper introduced the management of the foreign reserve investment addressing the management authority, investment profitability and the risks faced. Thirdly comes to the analysis of the purpose if holding the foreign exchange reserves and the domestic and global impact of China’s foreign exchange reserve. Following is the suggested solutions regarding its impacts and performance. At last is the summary of the major structured points of the paper.

Key word:
China’s foreign exchange reserves

Contents
1.Introduction ....................................................................................................... 3 2. The cause of China’s foreign exchange reserve ................................................ 4 3. The management of China’s foreign exchange reserves .................................. 5 3.1 official management authority ................................................................ 5 3.2 The profitability of China’s foreign exchange reserves investment ........ 6 3.3 Risk in China’s foreign exchange reserve Investment .............................. 8 4. Purpose of holding the foreign exchange reserves .......................................... 8 5. Impacts of China’s foreign exchange reserves .................................................. 9 5.1 Inflation pressure................................................................................... 10 5.2 The pressure on RMB appreciation ....................................................... 10 5.3 Weakening the monetary policy impact................................................ 11 5.4 Driving down the US interest rates........................................................ 11 6. Suggested solutions ........................................................................................ 12 6.1 Solution on the control of China’s foreign exchange reserves .............. 12 6.2 Solution to risk and low return on China’s foreign exchange reserves portfolio ............................................................................................. 13 7. Summary ......................................................................................................... 15 References .......................................................................................................... 16

2

1. Introduction
Started from the 1990s China is embracing the new development strategy of export-led growth which opens the door for the large inflows of FDI as well as the fast development of the manufactory industry. In the chart of the scales of China’s foreign reserves, it clearly illustrates from the 1990 the foreign reserves begins to grow dramatically In 1997 due to the Asia crisis the growth slowed down but continued from 2000. Already by 2000 China had currency reserves of $165 billion, slightly above 10 per cent of GDP. In 2009 currency reserves reached $2.3 trillion, equivalent to more than 50 per cent of China's annual output (Niall Ferguson, Moritz, 2009).

The Scale of China’s Foreign Exchange Reserves
1950-2013
45000
40000

amount unit :100 million USD

35000
30000
25000
20000
15000
10000
5000

-5000

1950
1952
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1980
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0

Data source:State Administration of Foreign Exchange of China, depicted by the author 3

The...

References: Data: "The Scale of Chinas Foreign Exchange Reserves (1950-2011)",Retrieved from
State Administration of Foreign Exchangehttp://www.safe.gov.cn/ [01.02.2014]
Hu Yuwei, 2010,"Management of China 's foreign Exchange Reserves: a case study on
the state administration of foreign exchange (SAFE)", European Economy, Economic
José Luis Escrivá, Alicia Garcia-Herrero, Galo Nuño, Joaquin Vial,2008,"After
Bretton Woods II",BBVA working paper June, 2008.
Ma Cihui, 2007," China 's Foreign Exchange Reserves: Cause, Consequence and
Solution ".
Wang Yongzhong, 2010,"The Structure ,Return and Risk of China 's Foreign Exchange
Reserves" ,International Trade and Investment series, working paper No.10004.
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