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China's Foreign Exchange Reserves Rank 2nd in the World
2004/05/22

  

       According to statistics, by the end of March this year, the balance of China's foreign exchange reserves had totaled US$316 billion, ranking second in the world.
   
       The growth of China' s foreign exchange reserves is mainly due to the continuous development of the country's economy. Rapid economic development has created more investment opportunities. Under the backdrop of global economic slowdown, China has become a great attraction to international investment and has achieved better results than expected in regard to foreign trade and foreign capital utilization.
   
       Since 2001, economic powers worldwide have entered a low-interest rate period. The US Federal Reserve Board has cut the interest rate 12 times, letting it plummet to the lowest level in 41 years. The interest rate of the US dollar in China has come down accordingly. At present, the gap between the interest rates for the savings deposits of the Renminbi (RMB) and foreign currencies has changed from negative into positive, and the interest rate of RMB savings deposits is higher than that of US dollar savings deposits. The RMB exchange rate is expected to increase further and the market prospect for the RMB remains sound. The good situation maintained by China in its foreign exchange earnings has laid a solid foundation for continuous growth in its foreign exchange reserves.
   
       Since its WTO accession, China has honored its commitments by enlarging the fields of foreign investment, which has resulted in the influx of foreign capital. Just like its previous efforts, the measures taken by China in recent years to promote opening-up have further stimulated overseas investment.
     
       Furthermore, improved management and reduced administrative interference have enhanced market players' confidence in China's economic development and in the RMB, and helped increase the country's foreign exchange earnings. In a word, the growth in China's foreign exchange reserves is due to the implementation of various macro-economic policies and the surplus achieved in both current and capital accounts of the balance of international payments. Hence, the foundation is solid.
     
       The growth in foreign exchange reserves has enhanced international and domestic confidence in China's economic development. However, some people worry that it may bring about negative influences. Internationally, a simple and universally applicable standard for the amount of foreign exchange reserves is unavailable. In the past, when international economic activities emphasized trade, it was believed that the foreign exchange reserves of a country should be sufficient to finance its imports for three or four months. With increases in the flow of international capital, particularly following the frequent occurrence of financial crises since the 1980s, various countries, while balancing the size of their foreign exchange reserves, have attached growing importance to capital flow and factors that guard against financial crisis. Meanwhile, they have taken into account factors in other fields, such as the extent and level of economic development, the scale of opening-up and the amount of reliance on other countries, the volume of foreign trade and fluctuation in the balance of international payments.
   
       China, as a large developing country, is in a stage of rapid economic development and restructuring. The possession of a considerable amount of foreign exchange reserves helps safeguard the credibility of both the country and Chinese enterprises, expand international trade, attract overseas investment, lower the cost of financing Chinese institutions in their effort to enter the international market, enhance the country's overseas financing capacity, and further advance the process of reform and opening-up.
   
       Given the current international monetary system, the possession of sufficient foreign exchange reserves is also conducive to coping with emergencies, curbing the fluctuations in the balance of international payments, and guarding against and relieving international financial risks. Particularly, as China has tightened up its ties with the global economy since its WTO accession, its economic development faces numerous uncertain factors. A considerable amount of foreign exchange reserves helps enhance the country's macro-control ability.
     
       Furthermore, the efforts made by the People's Bank of China in recent years to initiate open market operation of foreign exchange, purchase foreign exchange and issue the basic currency have not only increased the country's foreign exchange reserves, but also supported the implementation of the prudent monetary policy, increased money supply and helped mitigate the pressure of deflation.
     
       The growth in China's foreign exchange reserves has also benefited the Chinese people. Chinese citizens now find it easy to change foreign currency in banks before going abroad for tours or study. The maximum amount permitted to be changed by an individual for one year's study abroad is US$20,000, while that for an overseas tour is US$2,000. In the early 1990s, however, an individual on a business tour abroad could only change US$30, and individuals traveling abroad on their own could not change any foreign currency.
   
       Given the drastic fluctuation of the interest rates of many foreign currencies, the stability of the RMB has greatly enhanced the prestige and position of the Chinese currency in Asia and the world at large. In recent years, the RMB has become a "hard currency" most willingly accepted by residents in Southeast Asian countries. Even some shops and recreational establishments in some European countries welcome use of the RMB in their business transactions. Some airports and tourist attractions in the United States also offer RMB exchange service. Of the 29 tourist destination countries opened by China, the majority accept RMB from individual consumers. During this year's Spring Festival, the number of Beijing residents going on overseas tours increased by 14 percent as compared with that in the same period last year. The amount of foreign currency purchased by individuals, however, dropped by 50 percent.




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