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267 31 Strengthen Management of the State’s Forex Reserves and Foreign Debt1 December 19, 1994 Forex reserves have increased greatly this year and have now reached US$50 billion. This is a manifestation of the good economic situation, and also a major achievement of this year’s reforms. An Assessment of This Year’s Increase in Forex Reserves For many years, we wanted to increase our country’s forex reserves but were never able to do so. This year, we achieved this goal by reforming the forex management system. This is the result of our carrying out the correct policies of the Party Central Committee and an important result of our reforms—this achievement should be fully affirmed. On the other hand, the rather large increase in forex reserves has also created some new problems, mainly because the money at the central bank locked up by forex has increased by nearly RMB 300 billion, and to a certain extent this has helped drive up prices and the [state-set] purchase prices of commodities for export. Because the People’s Bank took measures to call in loans and relend them, the central bank did not increase its base money very much for this year, and money issuance can be kept to around RMB 150 billion, so the impact on inflation will be limited. We shouldn’t say that an increase in forex reserves,which is a good thing,is a bad thing, and we shouldn’t say that this important achievement of reform is a negative factor. But right now the trend in our forex reserves is only toward an increase, not a decrease. We should strengthen management in this area, especially management of forex conversions by foreign investors for capital projects. This isn’t very significant for increasing forex reserves and can only cause more RMB to be injected. Forex reserves have increased for many reasons—for example, the trade surplus , an increase in non-trade income, and increases in foreign investment. How much “hot money” has come in is still not very clear, but right now this doesn’t seem to be the main factor. However, all departments should take note of and 1. These are the highlights of remarks made by Zhu Rongji after listening to a work report by the People’s Bank of China on forex reserves. 268 Strengthen Management of the State’s Forex Reserves and Foreign Debt study exactly how much of the increase in forex reserves is due to the trade surplus , and they should compare numbers. Our present statistical methods are unable to clarify certain matters. Also, some of the money converted through trade accounts in fact belongs to capital projects of foreign investors, and we don’t fully know how much of this there is. Thoughts on a Reasonable Level of Forex Reserves If we consider a reasonable level of forex reserves to be an amount sufficient to pay for three months of imports, then we could arrive at two figures. One figure is from customs statistics. If we deduct the US$30 billion brought in by foreign-invested enterprises from the US$100 billion of total forex brought in, that leaves US$70 billion. Assuming [monthly imports require] US$7 billion, we would need about US$21 billion for three months. Add to that the US$10 billion we need to set aside for repaying 10% of our foreign debt, and a reasonable level for forex reserves would be US$30+ billion. The other figure includes exports by foreign-invested enterprises and comes to US$40 billion. At the moment, our forex reserves are about US$10 billion higher than the reasonable level. In judging the state of our forex reserves, we also have to consider this: how much forex can our exports earn next year? Will we be able to sustain this year’s momentum in utilizing foreign investment? Right now the Western economies are recovering, so the inflow of foreign investment next year may go down. Moreover, this year’s planned imports of grain and chemical fertilizer weren’t all completed, so we used less forex there. We will still have to import these items next year. So we shouldn’t simply say that our country has ample forex reserves. Whether or not they are ample will depend on next year’s circumstances. Several Measures for Strengthening the Management of Forex Reserves Thecurrentupwardtrendforforexreservesisstillverystrong.Weneedtostrengthen forex management and suitably constrain it. Here are some concrete measures. First, Strengthen...


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