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SAFE News
  • Index number:
    000014453-2019-0198
  • Dispatch date:
    2011-07-20
  • Publish organization:
    State Administration of Foreign Exchange
  • Exchange Reference number:
  • Name:
    FAQs on Foreign Exchange Reserves (I)
FAQs on Foreign Exchange Reserves (I)

Editor's Note: The FAQs on Foreign Exchange Administration Policies released by the State Administration of Foreign Exchange (SAFE) in July 2010 helped the general public learn about foreign exchange administration and received positive feedback. Recently, the media, experts, scholars, and the public have attached great importance to issues related to the foreign exchange reserves and offered many valuable opinions and suggestions, thereby giving us an important impetus to improve our work. In order to promote communication and interaction with people from all walks of life, we have compiled the FAQs on Foreign Exchange Reserves with respect to the recent hot topics. These FAQs will be published in three installments for your discussion and reference.

1. Recently, the SAFE issued a public statement that an appreciation of the RMB will not lead to any loss of foreign exchange reservesand explained this view from the perspective of book-value gains. Nevertheless, some people still believe that an RMB appreciation will gradually dissipate our wealthforeign exchange reservesjust like a cooked duck flying away.So, will an appreciation of the RMB really lead to actual losses of foreign exchange reserves and even social welfare?

Answer: An appreciation of the RMB will not directly causes losses of Chinas foreign exchange reserves. Foreign exchange reserves are essentially assets in foreign exchange, which use the USD as the recording currency. Variations in the RMB/USD exchange rate will result in a change in the book value of the RMB that is converted from the foreign exchange reserves, which is not the actually realized gains or losses. The variations only mean some differences in the book value when using different reporting currencies, be it RMB or USD, and thus will not have a direct impact on the effective purchasing power of the foreign exchange reserves. Changes in foreign exchange will only occur when the foreign exchange reserves are repatriated from overseas countries (regions) and converted into RMB. At present, China has no need to repatriate its foreign exchange reserves on a large scale.

We can give a counter example: if an RMB appreciation should lead to losses in Chinas foreign exchange reserves, then a depreciation of the RMB would bring about gains in our foreign exchange reserves. According to this logic, we could increase the returns on our foreign exchange reserves and even our social wealth by continually depreciating the RMB, which, in fact, is impossible.

We should adopt a comprehensive and objective view of the impact of an increase in foreign exchange reserves from the overall situation in Chinas development and reform. By the end of June 2011, Chinas foreign exchange reserves reached USD3.197491 trillion. Such increase in foreign exchange reserves is of great significance to improve Chinas external payment ability, promote its reform and opening-up, and raise its international status. However, the excessively rapid increase and large scale of the foreign exchange reserves pose certain challenges to their operation and management. Therefore, it is imperative that we accelerate the transformation of the economic development mode, follow the concept of expanding domestic demand, adjusting the structure, reducing surpluses, and promoting a balance,expedite the reform of the RMB exchange-rate formation mechanism, give full play to the fundamental role of the market in the allocation of resources, and promote the balance of payments so as to achieve a basic equilibrium.

2. According to a report by the U.S. Department of the Treasury, China is the largest holder of U.S. Treasury bonds. Lately, credit rating agencies, including Standard & Poors, Moodys, and Fitch, have repeatedly issued warnings about the U.S. debt problem. In the case of a USD depreciation and a future rise in inflation in the U.S., is it a growing risk to hold such a large sum of U.S. Treasury bonds? Will this sum be reduced in the future?

Answer: U.S. Treasury bonds are both a reflection of the credibility of the U.S. government and a critical variety of investment for U.S. and international institutional investors. To buy U.S. Treasury bonds with foreign exchange reserves is market investment behavior, and it will be dynamically adjusted according to market conditions. Any increase or decrease in the holding of U.S. Treasury bonds is a normal investment operation. We have noted the latest views expressed by Standard & Poors and other rating companies regarding the credit rating of the U.S. sovereign debt, and we expect that the U.S. government will take responsible policy measures to boost the confidence of the international financial market and respect and guarantee the interests of its investors.

3. Recently, the prices of gold, petroleum, and other major international commodities have risen dramatically. Why do we not invest our foreign exchange reserves more in these commodities and in energy resources?

Answer: Gold, silver, and other precious metals, as well as major international commodities like petroleum and iron ore, often experience great fluctuations in price, their market capacity is relatively limited, and their transaction, collection, and storage costs are high. Investment in these commodities is already included in the investment portfolio of our foreign exchange reserves; furthermore, there are special domestic institutions engaged in the collection and storage of major commodities and other related work, which serve as a supplement to the investment of our foreign exchange reserves so as to jointly safeguard Chinas overall interests. In addition, gold, petroleum, and so forth are consumed in huge quantities by residents and enterprises in China, so any large-scale investment of our foreign exchange reserves in such items will possibly raise their market prices, and in turn will hinder Chinas household consumption and economic development.

4. Some people believe that the scale of Chinas foreign exchange reserves is so large that we should not only pay attention to their security but also make efforts to increase the gains from our foreign exchange. What measures have been taken in this regard?

Answer: Financial investment is a major part of the investment of our foreign exchange reserves. Because modern financial markets are highly efficient, more returns are usually accompanied by greater risks. During the current global financial crisis, a great number of financial institutions went bankrupt or were acquired, some of which in the past had been leaders in the industry with splendid achievements. However, due to their failure to maintain a balance between risks and returns, they could hardly carry on under the deteriorating market conditions, thereby providing us with a good lesson. The management of our foreign exchange reserves must emphasize scientific operations and sustainable development.

The nature of Chinas foreign exchange reserves requires that their operation and management adhere to the principles of security, liquidity, and increases in value, among which security is the primary principle. In addition, the foreign exchange reserves should maintain sufficient liquidity to satisfy the general demand for external payments, and also to play an effective role in safeguarding the stability and security of the national economy and finance. Under the precondition of guaranteeing overall security and liquidity, the operation of our foreign exchange reserves shall strive for higher investment returns in an effort to help attain the goal of maintaining and increasing their value.

5. In the face of holding such a large scale of foreign exchange reserves, what can we do to better promote a diversification of our foreign exchange assets?

Answer: Diversification is one of the main operating principles of our foreign exchange reserves. In order to better promote our diversification strategy, we should avoid several misunderstandings. First, a superficial diversification of investment products -- different investment products may possess very similar risk factors, so it will not be spreading risks if we allocate funds to these sorts of investment products. Second, a superficial diversification of investment industries and regions -- without considering the interconnections among industries and the degree of integration among regions, investments will not necessarily achieve the expected goal of diversification. Third, deciding the timing to implement diversification according to the short-term performance of the market and public opinion -- effective diversification is a way to allocate assets strategically, which requires prospective planning and implementation. Diversification based on the short-term performance of the market and public opinion is often irrational and unprofessional, and can easily degenerate into opportunistic practices.



The English translation may only be used as a reference. In case a different interpretation of the translated information contained in this website arises, the original Chinese shall prevail.

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