Macro-Finance Salon (No. 82) Series of the 19th CPC National Congress (No. 6): A Full Perspective on the Decline of China's Foreign Exchange Reserves

2017-12-16 IMI

On December 16, Macro-Finance Salon (No. 82) was held in Renmin University of China. Zhang Ming, Senior Research Fellow of IMI, Director of International Investment of Institute of World Economics and Politics at CASS, delivered a keynote speech titled “A Full Perspective on the Decline of China's Foreign Exchange Reserves”. Qian Zongxin and Xiong Yuan, research fellow of IMI, attended the meeting. The salon was chaired by IMI research fellow Zhang Wenchun. Mr. Zhang Ming clarified the problems and controversies caused by the decline of China's foreign exchange reserves since 2014 from three aspects: valuation effect, appropriate scale and asset structure. In his opinion, the high proportion of foreign exchange reserves in China's total overseas assets and the low return on foreign exchange reserves investment have comprehensively contributed to the fact that China is a global creditor with consistent negative returns on investment. He analyzed the 811 reform policy and introduced three methods by which the central bank curbs the devaluation of the RMB exchange rate and its advantages and disadvantages. He pointed out that since the 811 reform, RMB has formed a unique pattern of "Asymmetrical Devaluation" against the US dollar: once the dollar strengthens, the exchange rate of RMB against the basket of currencies goes flat while the exchange rate of RMB against the US dollar depreciates; and once the dollar weakens, the RMB exchange rate against the US dollar keeps flat, but the RMB exchange rate against the basket of currencies devaluates. The introduction of countercyclical adjustment factor significantly changed the RMB "asymmetric devaluation" pattern. Especially since August this year, the "Asymmetrical Devaluation" has changed into a pattern of "Double Ascending." In his opinion, the valuation effect is an important reason for the change in the size of China's foreign exchange reserves since 2014. At present, the appropriate scale of China's foreign exchange reserves is about 2.8 trillion US dollars and the current balance of foreign exchange reserves is rather close to this scale. Finally, Mr. Zhang introduced the changes in the asset structure of Chinese overseas investment in the context of falling foreign exchange reserves. He pointed out that private sector investors in China have significantly reduced the share of US dollar assets in recent years and have started to hold yen assets since 2016 after significantly reducing their holdings of yen assets in the period of 2013 to 2015. Investments in America’s financial assets are still dominated by government bonds and agency debt, and stocks asset has reduced significantly in recent years. As for the investments in Japan's financial assets, Chinese investors’ investments in stocks and bonds are balanced, but they once significantly increased or decreased their holdings of short-term bonds. During the roundtable discussion, all guests communicated in-depth. Qian Zongxin thought that foreign exchange reserve is a very controversial problem in China. When the government chooses to keep its foreign exchange reserves, it is actually making comprehensive optimization and its goal is closely related to that of China’s economy. Zhang Ming answered the questions and provided an outlook about the challenge that the U.S. government's tax reduction policy will bring to China, and he further clarified the issues related to the exchange rate of the RMB, and put forward suggestions on how to avoid the exchange rate risks in business. He stressed that we need to step up capital controls, meanwhile, we must also avoid the distortion on resource distribution exerted by capital control.

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Macro-Finance Salon (No. 82) Series of the 19th CPC National Congress (No. 6): A Full Perspective on the Decline of China's Foreign Exchange Reserves

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