附录Rethinking Fast Growth in China’s Foreign Exchange ReservesI．IntroductionSince2000, China’s foreign exchange reserves have been growing fast. By the end of2001, China’s foreign exchange reserves had exceeded US$200bn and by the end of 2002 hadreached US$286.4bn. By the end of2003, it had reached US$403.3bn and in 2004 it reachedUS$609.9bn. In l 999, China’s foreign exchange reserves accounted for l 5.6 percent of itsGDP. The ratio has been growing continually and Was 36.88 percent of GDP by 2004, making China the second largest foreign exchange reserve holder in the worldafter Japan. Statistics released by Japan’s Ministry ofFinance on 7 July 2005 show that by the end of June the same year, Japan’foreign exchange reserve were valued at US$43.5bn.China has reserves ofUS$771 bn by the end ofJune 2005. However, China has a larger ratioofforeign exchange reserve to GDP than Japan. In 2005, China’s ratio offoreign exchangereserve to GDP was 37 percent, whereas that of Japan was 18 percent. By the end ofDecember 2005, China’s foreign exchange reserves had expanded further to reach US$818.87bn.II．Cause of China’s Sustained High Growthof Foreign Exchange ReservesThe main re ason for China’s sustained fast-expanding foreign exchange reserves in recentyears, is continual surpluses in the current and capital accounts of China’s balance ofpayments. In terms of sources, foreign exchange reserves can be divided into creditor’s rights-based reserve and debt-based reserve. The former is reserve from current accounts, whereas the latter is from the capital accounts．Foreign exchange reserves of developingcountries are mainly composed ofdebt-based reserve. Since the latter halfofthe 1990s, thestructure of China’s foreign exchange reserve sources has undergone significant change. From 1994 to 1996, China’s foreign exchange reserves were mainly composed of debt-based reserve. The increased foreign exchangereserves mainly came from capital accountsurplus, which mainly resulted from the increase in foreign direct investment(FDI)．Since 1997, the creditor’s rights segment ofChina’s foreign exchange reserves has gradually becomemore increased. However, during 2003-2004 the debt-based reserve rebounded dramatically. In that period,the capital account surplus soared from US$52.726bn in 2003 to US$110.66bnin2004, andChina’s foreignexchangereservesincreasedbyUS$206.681bnin2004. Thiswasclosely related to the continually growing expectations toward renminbi revaluation and theinflux ofinternational“hot money”in pursuit of speculative gain s.It is noteworthy that since 2004, the expectation for renminbi appreciation has beengrowing continually and a large amount of speculative capitalhas swarmed in. The Central Bank has adopted a compulsory foreign exchange settlement policy to maintainthe relative stability of the renminbi exchange rate, which is an important factor behindexpanding foreign exchange reserves. Seen from the current situation and the developmenttrend in the near future, the factors that have caused expansion ofChina’s foreign exchangereserves will continue.Admittedly, the sustained surpluses in the current and capital accounts of China’s balance of payments in recent yearsare the main reason for its continually fast-expanding foreign exchange reserves. However, two fundamental factors are worthconsidering：(i)flaws in the formation of the renminbi exchange rate regime are theinstitutional root cause of sustained high growth offoreign exchange reservesand(ii)thevarious theoretical misconceptions about China’s foreign exchange reserves have swayedpolicies and contributed to the sustained fast growth in China’s foreign exchange reserves.In terms ofinstitutional causes, the eruption ofthe 1997 Asian financial crisis held back the process of the China’s reform of the renminbi exchange rate regime.The renminbi came under great pressure to depreciate. To maintain the stability of the renminbi exchange rate, there was a forceddeparturefromtheorigi nal“managedfloating exchange rate regime.”Inthewakeofthe crisis, the Chinese economy was afected by the global economic recession and worseningdeflation, whichhas graduallymadetherenminbiexchangerateregime shifttoafactor“US-dollar-pegged fixed exchange rate regime.”Apart from the external impacts, the errors inChina’s macroeconomic policies an d strategies, such as those concerning foreign trade, foreign capital, foreign exchange reserve and industrial policies, have led to a distortion in theformation ofthe renminbi exchange rate regime．An obvious feature ofthat distortion is thecompulsory settlement and sales of foreign exchange in the banks, and the closed inter-bankforeign exchange market. In such an institutional framework, the implementation of thecompulsory foreign exchange settlement and sales, the convertibility ofthe current accountsandtheCentralBank’s controlontheforeign exchangepositionofthebanksdesignatedforforeign exchange operations have meant that banks, enterprises andresidents unable to holdforeign exchangeattheirownwil1. The CentralBank,meanwhile, holdsaconsiderableamountofforeign exchangeintheform ofstateforeign exchangereserves. Suchan arrangementwilldefinitely lead to the sustained an d accelerated expansion of foreign exchange reserves.In terms of policy orientation, there have long been many theoretical misconceptions regardingthebasicfunctionsandrolesofforeign exchange reserves：forexample, that foreignexchange reserves equal economic strength, exaggeration ofthe function offoreign exchangereserves, and accumulating reserves without definite andjustifiable reasons. All these factorshave strongly pushed the sustained high growth of China’s foreign exchange reserves.III．Analysis of the Theoretical Misconceptions onChina's Foreign Exchange Reserves1．Regarding the Opinion that Foreign ExchangeReserves Equal Economic StrengthSince the 1990s, there has been a popular opinion that the more foreign exchange reservesChina has, the better it is, and that the growth offoreign exchange reserves reflects China’s economic strength and improvement of its international status. The rapid growth in foreignexchange reserves is seen as a sign of sound economic operation. In reality, this is a biasedviewpoint that fails to apprec iate China’s actual economic condition．Foreign exchange reserve is a balancing item for international payments, which isclosely related to various aspects of the economy and to changes in the worldeconomy. Inconsidering the rational scale of foreign exchange reserves, one must take into accountvarious factors in the economy，including the scale and development pace of the nationaleconomy, the level ofeconomic opening up and foreign dependency, the level and structureofforeign trade development, the level ofutilization offoreign investment and the capacityoffinancinginternationally, theefficiencyofeconomic adjustmentand regulation, andtheforeign exchange management system. From an international perspective，developedcountries are morepowerful in terms of overall national strength, and have bettermacroeconomic regulation frameworks. Their home currencies are convertible and can beused for international payments. Therefore, theirdemand for foreign exchange reserves isrelatively weak. In contrast, developing countries are fettered by a low development level, with an imperfect macroeconomic regulation system. They are short of foreign exchangeresources and their home currencies are often not suitable for international use. Therefore, they are highly dependent on the international market and have a stronger demand forforeign exchange reserves．Indeterminingarational scaleofforeign exchangereserves, Chinaneedsto beawareoftheinternationallyacceptedempirical standards, andtoconsideritsownactualeconomic conditions, thatis, theimperfectmacroeconomicregulation system, unstable macroeconomy, imperfectmarketeconomic system,relativelyfragilefinancialsystemandforeign exchangeregime, andinconvertibilityoftherenminbi. In addition, Chinaisundergoingeconomictransitionandfacesmany uncertainties. Therefore, it needs to hold reserves to cope with possible contingencies. However, thisdoesnotmean thatthemore reserves are，thebetteroftheeconomywillbe . There areseveral reasons，as follows：(1)EverythingNeeds to be “within Limits,”and so does the Scale of Foreign Exchange Reserves(2)The Scale ofForeign Exchange Reserves does not Necessarily Represent the OverallEconomic Strength ofa Country(3)InGeneral,GrowthofForeignExchangeReservesdoesnotNecessarilyhaveaPositiveCo rrelation with Economic Operation2.Exaggeration of the Function of Foreign Exchange ReservesWith the rapid development offinancial globalization, the basic functions offoreign exchangereserve have also undergone changes. The demand for foreign exchange reserves is notonly for transactions and risk prevention, but there isalso“development-oriented demand'’. Especially in the case of emerging-marketcountries, increasing attention is often paid toforeign exchange reserves as a way to boost public morale, strengthen internationalcredibility, to improve financing capacity in the international market and to reduce reform risks. Such demand for foreign exchange reserves is called development-oriented demand. There has been development in the understanding of the function of the foreignexchangereserve. In the past, the use of foreign exchange reserves was confined to coping withinternational payment deficits and maintaining exchan ge rate stability ofhome currencies. Now it is used as a means to safeguard the international reputation of a country and toenhance its competitive edge in the international market. However, a one-sidedunderstanding of the role change has led to the specious view that change in the quantityofforeign exchange reserves is an important criterion or confidence index for measuring thesoundness of the macroeconomy. In this view, the main function of the foreign exchangereserve does not lie in its utility, but in its role as an index. For that reason, it has graduallybecome a mainstream opinion that the more foreign exchange reserves a country has, theberet it will be. The function of foreign exchange reserve has been deified and its role ofadjustment of international payments has been exaggerated. In reality, the role of foreignexchange reserve in adjusting international payments and preventing financial crisis islimited and has two main functions, which are outlined in the following two sections．(1)Foreign Exchange Reserves can Only Adjust Temporary Imbalance of InternationalPaymentsIt is only a temporary measure to use foreign exchange reserves to balance internationalpayments. It is implemented only for saving time in domestic economic restructuring. Whena country encounters a large amount of deficit in international payments over a relativelylong period of time, although foreign exchange reserves can be used to intervene in theprocess, its role will be limited no matter how large the scale of the reserve is. If foreignexchange reserves were to diminish rapidly, public confidence might collapse, which mighthave a disastrous impact on domestic economic development.(2)Large-scale Foreign Exchange Reserves are not the Decisive Factor in thePreventionofFinancial CrisisThe Asian financial crisis that broke out in the 1990s is a typical case for the study ofmodern financiaI crisis. Some Asian economies became severely affected as a result ofinterest rate changes in international markets, increases in foreign debt, abnormal changesin international capital flow and the speculative attack by international hot money. Althoughthose countries were all holding high level of foreign exchange reserves before the crisisburst out, they still could not manage to survive the attack of large quantities of speculativecapita1. The main reason is that the causes of the crisis were complicated. They includewrong government policies, aworsening economic foundation, abrupt changes in investorconfidence and in their market anticipationfragile financial systems and errors in financialmanagement. The root cause is that against the backdrop of a re-shaped internationaleconomic landscape, and accelerated financial globalization and liberalization, structuralproblems, coupled with policy blunders, had intensified in those crisis-afflicted transitionalcountries. As a result, even their high-level foreign exchange reserves could not save them.China successfully survived the Asian financial crisis. A rather popular view is that itwas because of China’s high-level foreign exchange reserves. Such a view deservesdiscussion. Admittedly,China was able to make use of high-level foreign exchange reservesfor the demand oftransactions, crisis prevention and development. In particular, it did playan active role in bolstering confidence in the economic development. However,those werenotthekeyfactors. Infact, duringtheAsian financial crisis, Chinaonlyhadforeignexchangereserves of US$150bn. Compared with the huge amounts of international speculative hotmoney, this was but a drop in the bucket. Its role in warding ofthe financial crisis was verylimited. A very important reason for China’s success in surviving the crisis was that Chinahad not opened up its capital market, and had imposed strict control on its capital account. Thanks to this“firewall,”the large-scale flow of speculative capital was prevented.With C hina’s relatively stringent foreign exchange management,it is worth discussingthe necessity to maintain a large pool of foreign exchange reserves as an anti-withdrawalemergency fund. For example, consider whether high-level foreign exchange reserve canreally help to improve the confidence of foreign investors. By the end of 2004, Japan hadforeign exchange reserves ofUS$844.5bn, ranking first in the world. Chinese Taiwan，inthe same period, owned US$240bn foreign exchange reserves and had a high foreignexchange reserve--GDP ratio. But so far, no statistics indicate that either Japan or ChineseTaiwan have much attraction for foreign investors. In contrast, foreign exchange reservesoftheUSAcan only sustainimportsforlessthan amonth, whichare farbelowthetheoreticalwarning limit. Despite this, no country or individual has any doubt about theUS capacity to make international payments. As proof,the USA has long maintained itsedge in attracting foreign investors. When the 1997 Asian financial crisis erupted, theaffected Asian countries were all holding a large pool of foreign exchange reserves, butnone of them escaped the crisis．3. Making Reserve “For the Reserve’s Sake”Regarding China’s foreign exchange reserves, there is a theoreticalmisconception thatleads to advocating reserve for reserve’s sake. This view is derived from the idea thatforeign exchange reserves equal economic strength, and the view that deifies the functionof foreign exchange reserve. This view is manifested in two ways．(1)Passive Holding ofForeign Exchange ReservesUnder the influence of the view that foreign exchange reserves equal economic strength, and the more reserves the better, some take a one-sided view thatprecautionary holding offoreign exchange reserves will avert peril, and reserves should not be used until the criticalmoment. As a result, foreign exchange reserves have in reality not been effectively utilizedalthough there has been a large pool of them. Reflecting such a view, in the management offoreign exchange reserves, such factors as the economic benefit, social benefit, risk control, efficiency of operation, structure of currencies of reserves and their asset structure havebeen ignored. This has made the management of reserves rigid and inflexible.(2)Taking the Increasing ofForeign Exchange Reserves as a Policy ObjectiveForeign exchange reserves are the important part of a country’s monetary policy. Changein reserves is an item for balancing international payments, and it is usually a result ofintervention in the foreign exchange market by the central banks of various countries. Change in the reserve aims to stabilize the exchange rate. Therefore, change in the foreignexchange reserve in itself is not a policy objective, but, rather, keeps the exchange ratestable to protect the export competitiveness of domesticenterprises. This is closely relatedto measures to boost economic growth and to ensure full employment, both of which arekey internal factors in maintaining the balance ofdevelopment. Obviously, change in foreignexchange reserves is not the only target of monetary policy. In China there has been atendency to take increasing foreign exchange reserves as the policy objective.No doubt, the various theoretical misconceptions regarding the scale ofChina’s foreignexchange reserves are important factors in the country’s sustained rapid expansion ofreserves, amaterthatbrews risk.IV．Adjustment of Foreign Exchange Reserve Policies China’s foreign exchange reserves have maintained a high growth rate. Although large-scale foreign exchange reserves have strengthened financial security, the security of theforeign exchangereserveassetitselfisworrisome. Chinahas paidahighpriceand shoulderedhigh risks for its large pool of foreign exchange reserves.There are further high risks, suchas loss of interest and the shrinking of the real value of its foreign exchange reserves. Thelarge scale of foreign exchange reserves have had a series of adverse impacts on China’s economic development, and has created risk. The current condition of China’s foreignexchange reserves has become a critical hidden danger threatening financial safety. Therefore, there is an urgent need to adjust China’S foreign exchange reserve policies.1. Control the Scale of Foreign Exchange ReservesFirst, China’s foreign exchange reserves should be maintained at a reasonable leve1. Froman international perspective, it is generally accepted that the minimum foreign exchangereserves shouldbeableto sustainimportsforatleast 3months, aperiodthatisconsideredthe warning threshold. Based on intemational experience, the warning limit for the ratio offoreign exchange reserve to foreign debt balance is 30 percent. From China’s point ofview, its imports over 3 months in 2004 would have needed approximately US$140bn offoreignexchange, whereas another US$70bn would have been needed to satisfy the warning limitfor the ratio offoreign exchange reserve to foreign debt balance. Ifthe needs for satisfyingforeign investors’transfer of their profits to their home countries, financial reform andother contingencies are taken into consideration, the scale of China’S foreign exchangereserves should be largely maintained at a rational level ofUS$300-400bn.Second, China needs to choose the appropriate time to adjust relevant macroeconomicpolicies and strategies that have led to the sustained surplus in its balance of internationalpayments, including foreign trade, foreign investment and industrial policies. Regardingtrade policy, for instance, China has long implemented the traditional trade strategy that isbased on the basic principle of creating foreign exchange through exports. This has led tosustained trade surplus and rapid expansion of foreign exchange reserves, which not onlyexacerbates the pressure for renminbi appreciation, but also carries great risk. Moreover, improving the determination of the basis of the renminbi exchange rate, and rectifying itsdistorted formation mechanism, will improve the foreign exchange market, increase theflexibility ofexchange rate and improve the exchange rate form ation mechanism．This Can holdbacktherapidgrowthinforeign exchangereserves. Nodoubt, adjustingthe relevant macroeconomic policies, including foreign trade policy and strategies, is whatis needed for ens uring China’s security of foreign exchange reserves．2. Strengthen Management of Foreign Exchange ReservesIn the current situation, apart from controlling the scale of foreign exchange reserves, it ismore importan t for China to implement sound man agement and use of reserves. First, itshould be well man aged so as to produce the maximum economic and social benefits. Inmanaging foreign exchange reserves, besides reducing its adverse impacts on themacroeconomy, the most urgent task is to bring out the positive role of the large pool ofrenminbi deposits and foreign exchange reserves in boosting economic growth, and toestablish a new mechanism to transform reserves and deposit fund into investment andcapita1. Second, risk management of foreign exchange reserves should be strengthenedand a risk management framework should be established and improved. Third, the efficiencyof foreign exchange reserve operation should be improved. Finally, the currency and assetstructures of foreign exchange reserves should be considered in a rational way.对中国外汇储备快速增长的反思I．序言从2000年起，中国的外汇储备一直快速增长。