Use of foreign exchange reserves

China will steadily push forward foreign exchange rate reform and actively explore and expand the use of its huge foreign exchange reserves, according to the national financial work conference.

China would strengthen operation and management of foreign exchange reserves and facilitate the balance of international payment, said Wen.

On January 15, the People's Bank of China announced that the country's foreign exchange reserves hit $1.07 trillion at the end of last year, up $247.3 billion from the end of 2005.

China's foreign exchange reserves have been increasing rapidly on the back of a surging trade surplus and rising foreign direct investment.

At present, the State Administration of Foreign Exchange is in charge of investing much of China's foreign exchange reserves, mainly in U.S. treasury bonds and other high-quality assets.

The fast accumulation of foreign exchange reserves is an indication of China's growing economic strength, but it has also put China under more pressure from trading partners to appreciate the renminbi (RMB) faster and let it face increasing trade friction, said Zhang Liqing, professor with the Central University of Finance and Economics.

As foreign exchange reserves rise, there are calls for using part of the money to purchase advanced technologies and equipment, to replenish social security funds, or to develop education, medicare, environmental protection and other social undertakings.

But such suggestions fail to understand the fact that China's foreign exchange reserves keep increasing as the central bank buys massive amount of dollars in the open market to allow gradual RMB appreciation, analysts say.

"The foreign exchange reserves are not treasury capital, but liabilities of the central bank, which means they cannot be used freely," said Zhao Xijun, professor with Renmin University of China.

China needs foreign exchange reserves to meet its payment requirements for imports and exports. Apart from that, the surplus should be best allocated and invested to achieve the highest returns, said Justin Lin, Director of the China Center for Economic Research of Peking University.

Lin stressed that any use of foreign exchange reserves has to be fully discussed and carried out in a prudent way. "To actively explore and expand channels of using foreign exchange reserves will be a major point in future work," he said.

The first national financial work conference (1997) It was convened on November 17-19, 1997, when a financial crisis swept through Southeast Asia. After the conference, China adopted proactive fiscal and financial policies, set up the China Insurance Regulatory Commission and instituted reforms of the four largest state-owned commercial banks. Four asset management corporations were set up, taking over non-performing assets of 1.4 trillion yuan from the four major state-owned banks and depositing 270 billion yuan into them. The second national financial work conference (2002) Convened on February 5-7, 2002, it signaled the establishment of the China Banking Regulatory Commission. After the conference, China instituted the shareholding system reform of three state-owned banks: Bank of China, China Construction Bank and Industrial and Commercial Bank of China. The three banks received a total of $60 billion from China Central Huijin Investment Co. The country also launched a trial reform of rural credit cooperatives. Source: crienglish.com The third national financial work conference (2007) Other policies decided by this national financial work conference include the following: · Continuing to deepen the reform of state-owned banks. The immediate task for the listed Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Bank of Communications is to optimize corporate governance and push forward grass-roots reforms in local branches; · Facilitating rural financial reforms, moderately reducing the access threshold for financial institutions in the rural market, encouraging and supporting the establishment of diversified rural credit organizations, including those engaged in small loans, and pushing forward agricultural insurance; · Providing more financial support to small and medium-sized enterprises, self-innovation projects, public undertakings and less developed regions; · Facilitating fair competition between domestic and foreign financial institutions and advancing financial collaboration between the mainland, Hong Kong and Macao; and · Optimizing the management of the insurance, banking and securities sectors, tightening control over cross-border short-term capital flow-speculative funds in particular- and enhancing supervision over money-laundering activities. Source: Xinhua