Soaring forex reserve challenges China's financial strategy

The rapid growth of China's foreign exchange reserve has led to increasing academic disputes on further development of the country's financial strategy.

A central bank report released recently said that China's foreign exchange reserve reached 711 billion US dollars in June, up 51.1 percent from a year earlier. The increase in the foreign exchange over the first half of the year was 101 billion US dollars, about 33.7 billion US dollars more than the figure in the same period of last year.

"If such a growth rate persists, China's foreign exchange reserve will probably break the record of one trillion US dollars by next June, which may cause the inflation, " said Wang Zhihao, asenior analyst of the Chartered Bank.

Tan Yaling, another financial expert with the Bank of China, said that it was only a common practice in developed countries to keep their foreign exchange reserve less than 10 percent of their gross domestic product or a level adequate to meet their import demand in three months.

"China, strained with double pressure from speculative capital and domestic financial reform, has to rely on an abundant foreign exchange reserve to handle financial emergencies and to bring psychological safety to its people," Tan said.

The real burning issue, as Tan pointed out, is how to make use of the big amount of foreign exchange. "It will be more dangerous to simply leave it unused, " she added.

In the last few months, China's central bank injected 60 billion US dollars to the Bank of China, the Construction Bank of China and the Industrial and Commercial Bank as a bailout. Industrial insiders said that the Agricultural Bank of China would also receive such bailout soon.

Together with the State Administration of Foreign Exchange, the central bank also mapped out a number of policies to loosen its control on foreign currencies. For instance, Chinese who plan to study abroad have been allowed to exchange more Renminbi into foreign currencies while companies are encouraged to go in for overseas purchases.

"These are good ways to alleviate the pressure of massive foreign exchange reserve," Tan said.

Source: Xinhua