What Are Foreign Exchange Reserves?

Foreign exchange reserve, also known as foreign exchange reserve, refers to foreign exchange assets that are centrally held by central banks and other government agencies in various countries and can be converted into foreign currencies at any time in order to meet the needs of international payments. Under normal conditions, the sources of foreign exchange reserves are trade surpluses and capital inflows, which are concentrated in the country's central bank to form foreign exchange reserves. The specific form is: the government's short-term deposits abroad or other payment methods that can be cashed abroad, such as foreign securities, foreign bank checks, promissory notes, foreign currency bills, etc. It is mainly used to settle the balance of payments deficit and to use foreign exchange reserves to buy domestic currencies to intervene in the foreign exchange market in order to maintain the exchange rate of the country's currency.

foreign exchange reserves

Governments of all countries manage and operate foreign exchange reserves, generally following security, liquidity and

To cope

Foreign exchange reserves as a national economy

1. Adjust the balance of payments and ensure external payments

When the country's import and export transactions have a relatively obvious gap or trade gap caused by other factors, foreign exchange reserves can be used to fill the deficit, maintain the reputation of the country's international transactions, avoid more economic crises, and ensure normal economic development.

2. Intervene in the foreign exchange market and stabilize the local currency exchange rate

The country's exchange rate is determined by the country's supply and demand relationship. If the country's supply and demand relationship has a disordered imagination, which leads to the abnormal development of the market exchange rate, it will have an impact on the operation of the country's monetary policy. Holding foreign exchange reserves to buy foreign bonds adjusts the market and stabilizes the exchange rate.

3. Maintain international reputation and improve foreign

Foreign exchange reserves respond to questions

RMB appreciation will not directly lead to loss of foreign exchange reserves

Some scholars claim that due to the appreciation of the RMB against the US dollar, foreign exchange reserves have lost 271.1 billion US dollars since 2003. In this regard, the relevant person in charge of the State Administration of Foreign Exchange responded on May 6, 2011 that the appreciation of the RMB will not directly lead to the loss of foreign exchange reserves. It is announced that foreign exchange reserves are foreign exchange assets, and the US dollar is used as the bookkeeping currency. Changes in the exchange rate of the RMB to the US dollar have resulted in changes in the book value of the foreign exchange reserve converted into RMB, which is not actual profit or loss, and does not directly affect the actual external purchasing power of the foreign exchange reserve. It is only the use of RMB or the US dollar as the reporting currency that results in book differences. Only when the foreign exchange reserve is transferred back and exchanged back to the RMB will actual changes in currency exchange occur. At present, there is no need for large-scale repatriation and settlement of foreign exchange reserves in China. Moreover, considering that banks, enterprises and individuals have already obtained equivalent RMB income when they sold foreign currencies at the outset, after the appreciation of the RMB, they have also made huge gains in reducing import costs and increasing investment income. Meat has already been in the pot ".

The person in charge said that the book loss of foreign exchange reserves caused by the appreciation of the RMB was far less than the book surplus of my financial assets. The book losses and surpluses generated by the reporting currency are like the two sides of a coin (called duality in economics). Corresponding to the book loss after the USD denominated reserve is converted into RMB, the book surplus of RMB financial assets held by Chinese nationals denominated in USD is denominated. As of the end of March 2011, China's foreign exchange reserve balance was 3.04 trillion US dollars, which was converted at the exchange rate at the end of March. During the same period, the total size of RMB financial assets such as RMB deposits, stocks, government bonds and insurance assets of enterprises and residents was five times that of our foreign exchange reserve assets the above. This means that when the renminbi appreciates, the book return of RMB assets is more than 5 times the book loss of foreign exchange reserve assets. If we consider the scale of other financial assets and real estate assets held by residents in the form of stocks, bonds, etc., the book returns of RMB assets will be even greater. Similarly, the aforementioned losses or gains are all changes in book value, as long as no actual conversion occurs, it will not become a reality.

He said that the actual purchasing power of foreign exchange reserves depends on the yield of foreign exchange reserves and the inflation rate of the country where the investment is made. China's foreign exchange reserves have maintained stable returns for many years. The operating rate of return is much higher than the inflation level of major investment countries (regions) such as the United States, Europe, and Japan, which has guaranteed the actual purchasing power of foreign exchange reserves. From 2000 to 2010, the U.S., European, and Japanese consumer price indexes (CPI) increased by 2.4%, 2.1%, and -0.2%, respectively, and the average annual operating yield of our foreign exchange reserves was much higher than these levels.

Non-ordinary people's hard-earned money is equivalent to voluntary exchange

On July 26, 2013, SAFE announced the China International Investment Position Chart at the end of March 2011. This is the first time SAFE has broken the practice of annual issuance and announced quarterly international investment position statistics. At the end of March 2011, China's external financial assets were US $ 4.3498 trillion, an increase of 7% over the end of the previous year; external financial liabilities were US $ 2.4608 trillion, an increase of 5%; net external financial assets were US $ 1.934 billion, an increase of 8%.

At the same time, SAFE also once again answered the hot issues of foreign exchange reserves. This is also the second time that SAFE has answered questions related to foreign exchange reserves in less than a week. This time, SAFE has "clarified" the statement that "foreign exchange reserves are" hard-earned money "of the common people and stated that" The obstacle to "sinking foreign exchange in the people" is not the policy, but the willingness of foreign exchange-related subjects to hold the currency.

Some people think that China's foreign exchange reserves are the "hard-earned money" of ordinary people, which are exchanged by companies or individuals for real commodities, energy, resources, and hidden environmental costs.

SAFE stated that the foreign exchange reserve was formed by the People's Bank of China to purchase foreign exchange in the foreign exchange market by putting in base currency. When the People's Bank of China bought foreign exchange, the corresponding RMB was paid to the original foreign exchange holder. In other words, during the formation of foreign exchange reserves, enterprises and individuals did not hand over foreign exchange to the country, but sold it to the country and obtained equivalent RMB. These transactions are based on the principle of equality and voluntariness. The economic benefits of enterprises and individuals have been realized during foreign exchange and RMB exchange.

SAFE also said that due to factors such as RMB appreciation expectations and domestic foreign exchange spreads, companies and individuals are more willing to settle foreign exchange, and are generally unwilling to hold and retain foreign exchange. In other words, the obstacle to "hiding foreign exchange in the people" is not the policy, but the willingness of foreign exchange-related subjects to hold foreign exchange.

Regarding the question of whether foreign exchange can be directly distributed to the public or used to establish a sovereign pension fund, SAFE stated that foreign exchange reserves are different from fiscal surplus funds. They are formed by the central bank's purchase of foreign exchange in the foreign exchange market. The local currency funds used for foreign exchange purchases are directly Liabilities originating from the central bank are reflected as an increase in central bank liabilities, so foreign exchange reserves are directly reflected on the asset side of the central bank's balance sheet, which corresponds to the corresponding central bank liabilities. The central bank's balance sheet corresponds to local currency liabilities. The free use of foreign exchange reserves is equivalent in nature to the printing of banknotes by the central bank at will, and the uncontrolled expansion of currency issuance, which will cause serious consequences such as inflation.

The SAFE also stated that if a company or bank needs foreign exchange for foreign trade and "going global", it can always use RMB funds to purchase foreign exchange without any policy obstacles. If the foreign exchange reserve is simply loaned to domestic banks, it will further reduce foreign exchange purchases and increase the pressure on the central bank to purchase foreign exchanges, which is not conducive to macroeconomic regulation.

Foreign exchange reserve hotspots

In July 2010, the State Administration of Foreign Exchange issued the "Hot Issues in Foreign Exchange Management Policies", which promoted and facilitated public awareness and understanding of foreign exchange management, and received good feedback. The media, experts and scholars, and the public have paid close attention to issues related to foreign exchange reserves and put forward many valuable opinions and suggestions. This is an important driving force for our improvement and improvement. In order to better promote interaction and communication with all sectors of the society, we have compiled a question and answer on hot topics in foreign exchange reserves that has attracted a lot of attention recently, and will be published in three journals for your discussion and reference.

1. The State Administration of Foreign Exchange stated publicly that the appreciation of RMB will not lead to the loss of foreign exchange reserves and explained from the perspective of book profit and loss. Nevertheless, there are still views that the appreciation of the RMB has slowly evaporated the original wealth of foreign exchange reserves, like a "cooked duck" that is flying away. So, has the appreciation of the RMB really caused the actual loss of foreign exchange reserves and even social welfare?

Answer: RMB appreciation will not directly lead to loss of foreign exchange reserves. Foreign exchange reserves are foreign exchange assets and the US dollar is used as the bookkeeping currency. Changes in the exchange rate of the RMB to the US dollar have resulted in changes in the book value of foreign exchange reserves converted into RMB, which is not actual profit or loss, nor does it directly affect the actual external purchasing power of foreign exchange reserves, but only the book difference caused by using RMB or US dollars as the reporting currency. Only when the foreign exchange reserve is transferred back and exchanged back to the renminbi will actual changes in exchange occur. At present, there is no need for large-scale repatriation of China's foreign exchange reserves.

We can also give a counter-example. If the appreciation of the RMB would lead to the loss of foreign exchange reserves, then the devaluation of the RMB could lead to gains in foreign exchange reserves. According to this logic, it is possible to increase the foreign exchange reserve income and even increase social wealth by continuously devaluing the RMB. But in fact, the devaluation of the renminbi will not increase foreign exchange reserve income, nor will it increase social wealth.

Starting from the overall situation of China's development and reform, we must comprehensively look at the impact of the growth of foreign exchange reserves. As of the end of June 2011, China's foreign exchange reserves reached US $ 314.891 billion. The increase in foreign exchange reserves has positive significance for strengthening China's ability to pay abroad, promoting reform and opening up, and enhancing China's international status. However, the rapid growth and large scale of foreign exchange reserves have also brought certain challenges to the management of foreign exchange reserves. To this end, we should accelerate the transformation of the economic development model, accelerate the reform of the RMB exchange rate formation mechanism in accordance with the thinking of expanding domestic demand, adjusting structure, reducing surplus, and promoting balance, and bring the market's basic role in resource allocation to a greater extent. Promote the basic balance of payments.

2. According to the US Treasury Department report, China is the largest holder of US Treasury bonds. And credit rating agencies such as Standard & Poor's, Moody's and Fitch frequently issue warnings about US debt. With the depreciation of the US dollar and even rising US inflation in the future, can holding such a large amount of US Treasury bonds face increasing risks? Will US Treasury bonds be reduced in the future?

Answer: U.S. Treasury bonds are a credit reflection of the U.S. government and an important investment product for domestic and international institutional investors. Holding US Treasury bonds by foreign exchange reserves is a market investment behavior. Dynamic adjustments in accordance with market conditions, increasing or reducing holdings are normal investment operations. We have taken note of the views expressed by rating companies such as Standard & Poor's on the issue of US sovereign debt credit ratings, and hope that the US government will effectively take responsible policy measures to enhance confidence in international financial markets and respect and safeguard investor interests.

3. The prices of international commodities such as gold and oil rose sharply. Excuse me, why don't foreign exchange reserves invest more in such commodities and energy resources?

Answer: The prices of precious metals such as gold and silver and international commodities such as oil and iron ore fluctuate greatly, the market capacity is relatively limited, and the transaction and storage costs are high. The foreign exchange reserve portfolio already includes related investments. Another specialized agency in China is already engaged in the related work of bulk commodity collection and storage, which complements foreign exchange reserve investment and jointly safeguards the overall national interest. In addition, Chinese residents and enterprises consume very large amounts of gold and oil. Direct large-scale foreign exchange investment in these areas may push up their market prices, which is not conducive to Chinese residents' consumption and economic development.

4. Some people believe that the scale of China's foreign exchange reserves is already so large. It is not enough to focus on the safety of foreign exchange reserves. It is also necessary to focus on improving returns. What measures are there?

Answer: Foreign exchange reserve investments are mainly financial investments. Modern financial markets are relatively effective, and increasing returns are often accompanied by increased risk taking. During the international financial crisis, a large number of financial institutions went bankrupt or closed down or were acquired. Many of them have outstanding performance in the industry. However, due to the inability to grasp the balance between risks and returns, once the market conditions reverse, it will be difficult to continue. Cars can learn. Therefore, foreign exchange reserve management must emphasize scientific operation and sustainable development.

The nature of China's foreign exchange reserves determines that it must conduct operations and management in accordance with the principles of security, liquidity, and value-added. Safety is the first principle. In addition to security, foreign exchange reserves must maintain sufficient liquidity, not only to meet general external payment needs, but also to effectively play a role in ensuring the stability and security of the country's economy and finance. Under the premise of ensuring overall security and liquidity, foreign exchange reserve operations should strive to increase investment returns in order to better achieve the goal of maintaining and increasing foreign exchange reserve value.

5. For China's large-scale foreign exchange reserves, how to better promote the diversification of foreign exchange reserve assets?

Answer: Diversification has always been one of the main operating principles of foreign exchange reserves. To better promote diversification strategies, we should pay attention to preventing several misunderstandings. The first is the surface diversification of investment products. Seemingly different investment products may have very close risk factors, and the allocation of funds to such investment products cannot achieve the effect of spreading risks; the second is the surface diversification of investment industries and regions. If you do not consider the relevance of different industries and the degree of integration between regions, investing in different industries and regions may not achieve the expected diversification goals; the third is to determine diversification based on the short-term performance of the market and public opinion. Timing of implementation. Effective diversification is a strategic asset placement and requires forward-looking planning and implementation. Following the short-term performance of the market and public opinion to achieve diversification is often not rational and professional enough, and it tends to fade into speculative behavior that chases up and downs.