China Shifts Forex Policy to Reduce Pressure on Authorities

Strategic Insights -

Beijing is adjusting its foreign exchange reserve policy, allowing businesses and residents to hold more foreign currency, said Wu Xiaoling, deputy governor of the People's Bank of China. This shift aims to reduce pressure on authorities to manage excess liquidity in the forex market and enforce the trading band of the renminbi exchange rate. China's forex reserves have risen to US$853.6 billion, overtaking Japan as the biggest holder. The rapid accumulation of reserves is driven by trade surpluses, foreign direct investment, and a lax forex administration regime.

Key Takeaways:

  • China is shifting its foreign exchange reserve policy to allow businesses and residents to hold more foreign currency, reducing pressure on authorities to manage excess liquidity.
  • The policy aims to readjust the economic structure and address the implications of a huge trade surplus on the forex market.
  • Wu Xiaoling emphasized that the new policy stance involves having more forex "held by" the people, rather than "hidden among" them, addressing misconceptions in recent media reports.
  • The People's Bank of China has taken measures to loosen capital controls, allowing businesses to keep more forex and sell less to banks.
  • The central bank has also allowed individuals to buy more forex from banks for overseas travel and studies.
  • China's forex reserves have grown to US$853.6 billion, with the rapid accumulation driven by trade surpluses, foreign direct investment, and a lax forex administration regime.
  • The changes in China's forex reserves reflect its macroeconomic performance and international payments, with no scientific method to measure the appropriate level of reserves.
  • Speculation of a stronger renminbi remains strong, with some trading partners complaining that the currency is undervalued.

Statistics:

  • China's forex reserves have risen to US$853.6 billion, overtaking Japan as the biggest holder.
  • Trade surpluses have driven significant growth in China's foreign exchange reserves.
  • Speculative capital has continued to flow into China, despite the revaluation of the renminbi last July.
  • Businesses are taking more forex loans, contributing to the accumulation of reserves.
  • The central bank has issued more local currency to buy excess dollars and enforce the trading band of the renminbi.

Sources:

  • "China is shifting from stockpiling foreign exchange reserves in State coffers to letting businesses and residents hold more foreign currency, a top central bank official said yesterday." - Asia Pulse (no date)
  • Wu Xiaoling, Deputy Governor of the People's Bank of China.