RMB Appreciation Can’t Stop Foreign Exchange Reserve Hike

Due to the influence of the stress for RMB appreciation, China’s foreign exchange reserve is once again in the centre of world’s attention.

The Sino-US disputes once again triggered the world’s interest in China’s foreign exchange reserve. The experts explained that China’s foreign exchange reserve is valued by the US dollars; therefore the RMB appreciation has only a tiny influence over the foreign exchange reserve.

In consideration of the international financial factors, the experts said that buying the US sovereign debts is still the main channel for foreign exchange reserve; however, long-term effects should be taken into consideration in order to shun the US dollar exchange rate risk. Ways like purchasing industrial resources, direct investment in the USA, investment in Africa and founding Asian monetary fund are recommended.

Frustrated Foreign Exchange Reserve

The possible RMB appreciation made the world focus on China’s foreign exchange reserve which is beyond 2 trillion US dollars.

The experts said that the RMB appreciation will only cause a paper loss of the foreign exchange reserve. Lu Zhengwei, chief economist of China Industry Bank, said the RMB appreciation, if any, will not exert big direct influence upon China’s foreign exchange reserve which is valued by US dollar.

“However, the appreciation may have big influence over the enterprises in China, including the financial institutions,” said Lu Zhengwei. Loss would happen to them because their financial results are valued by RMB.

Sun Lijian, vice dean of economic school, Fudan University, divided the influence of RMB appreciation into two kinds: one is the stock and the other one is the increment. The RMB appreciation will cause the stock of foreign exchange reserve valued by RMB while it is hard to clarify the influence of the appreciation over the foreign exchange reserve increase.

According to Sun Lijian, the RMB appreciation has quite limited restrain over the foreign exchange reserve increase. “Our foreign exchange reserve will keep increasing if our economic structure remains unchangeable. Solving the trade deficit or surplus should not depend on the exchange rate.” From the viewpoint of the US consumers, China’s commodities are hard to replace. The RMB appreciation will finally lead to the damage to the US consumers’ benefits.

US Debts still the Main Channel

According to the analysis of the experts, the use of foreign exchange reserve is haunted by the huge “size” of China’s foreign exchange reserve. In spite of the disputes about investing in the US national debts, it is really hard for China to find a market as big as the USA to receive the huge foreign exchange reserve investment. Therefore, buying the US national debts still prevails against the other channels.

However, as mentioned before, long-term effect should be put into consideration in order to shun the US dollar exchange rate risk. The ways like purchasing industrial resources, direct investment in the USA, investment in Africa and founding Asian monetary fund are recommended.

Sun Lijian said that there are three channels of using foreign exchange reserve besides buying the US national debts. The first channel is consumption, which means buying the industrial products like crude oil and importing technologies. However, presently there are a lot of difficulties in using the method. The second channel is investment, which is divided into direct investment and financial investment. The direct investment includes establishing plants or enterprises in foreign countries or even acquiring the foreign companies. But the differences in corporate culture as well as management theory will pose a challenge. The financial investment means the direct entry into the capital market. The financial investment, in Sun Lijian’s opinion, is the biggest challenge. China goes short of financial talents which could bring about big financial risk. In comparison, buying the US national debts is safe though the return for investment is low.

The third way of using foreign investment is to invest in Africa and to set up Asian monetary funds. Sun Lijian said: “Although this only takes a smaller part and is a less obvious way compared with the others, it still has significant meanings – good for the globalization of RMB.”

Zuo Xiaolei, chief economist of Galaxy Securities, said that buying resources would theoretically be the best choice. But we have the problem that ‘we can not buy the things we want to buy even though we have enough money at hands. So it is not quite feasible to buy the real materials.”

Zuo Xiaolei said that buying the US national debts is not really the best choice for the Chinese government.