Rethinking fast growth in China's foreign exchange reserves

Abstract

The sustained surpluses in the current and capital accounts of balance of payments are the main reason for the continuing rapid expanse of China's foreign exchange reserves in recent years. However, flaws in the formation of the renminbi exchange rate regime are the institutional root cause of the sustained high growth in foreign exchange reserves. Various theoretical misconceptions about the scale of foreign exchange reserves have swayed policies and contributed to its sustained fast growth. Sustained high growth of China's foreign exchange reserves, and its extraordinary large scale, carry tremendous risks. Because the security of foreign exchange reserves affects a country's financial safety, China urgently needs to adjust its foreign exchange reserve policies. Edited by Zhinan Zhang © Institute of World Economics and Politics, Chinese Academy of Social Sciences 2006.