What Are Primary Reserves?

International reserves, also known as "international reserve assets". Refers to monetary assets that are officially held by a country that can be used for international payments and that can maintain the exchange rate of its currency. It is mainly composed of the following parts: officially held gold; officially held freely convertible currencies; reserve assets and special drawing rights in the International Monetary Fund. After World War II, the US dollar, British pound, and other major western currencies have successively become freely convertible currencies. Today, the US dollar is still the most used in the balance of payments. As the exchange rates of the currencies of countries in international financial markets may fluctuate, the freely convertible portion of international reserves is vulnerable. ^[1]

International reserve

1. The determination of a moderate amount of international reserves is the number one issue in managing them.

Means of managing total international reserves, especially

1,

International reserves make up for the deficit

The theory and experience prove that when a country's export volume decreases in international transactions or a temporary balance of payments deficit due to special natural disasters and wars, and this part of the deficit cannot be balanced by borrowing foreign debts, people The first option is to use international reserves to make up for this deficit. In this way, not only can the country's international reputation be maintained, but also it can avoid being forced to take "cutting and performing" measures such as restricting imports to balance the deficit and affect the normal development of the country's economy.

At this time, the use of some international reserves to balance the deficit will slow down the negative impact of some drastic economic tightening policies adopted by the governments of the deficit countries to balance their international balance of payments on the domestic economy. International reserves can play a buffer role here. However, if there is a fundamental imbalance in a country's balance of payments, the use of international reserves will not completely solve the problem. On the contrary, it will lead to the depletion of international reserves. Therefore, when a country s economy suffers from a policy deficit or an irrational economic structure that causes a continuous deficit in international support,

The use of reserve assets, including foreign exchange reserves, must be carried out with caution.

International Reserve Supported Exchange Rates

This is one of the important roles of international reserves. As mentioned above, when the "G10" defined international reserves that year, it emphasized that international reserves were used as "intervention assets" to maintain currency exchange rates. Especially after the international community generally implemented a floating exchange rate system in February 1973, although in theory the central banks of various countries did not assume the obligation to maintain the stability of the exchange rate, and the exchange rate went with the market, but in practice, it was precisely this system that caused frequent exchange rate fluctuations and The volatility is large, so for the benefit of each country, each country stabilizes its currency exchange rate at the desired level, and more or less, or explicitly or implicitly, uses international reserves to intervene in its currency exchange rate.

In 1985, seven western industrialized countries established a joint intervention mechanism on exchange rates. One of the basis of the mechanism's operation is to hold a certain amount of international reserves. For this reason, many countries have also set up foreign exchange stabilization funds to guarantee the funds needed to intervene in the foreign exchange market. The foreign exchange stabilization fund generally consists of foreign exchange, gold, and the currency of the country. When the foreign exchange rate continues to rise and the local currency exchange rate continues to fall in a certain period, the foreign exchange market is sold through the stabilization fund and the local currency is bought; otherwise, Sell local currency and buy foreign exchange to stabilize the exchange rate. Because the foreign exchange stabilization fund is not inexhaustible, when a country's balance of payments has a fundamental or long-term imbalance and the exchange rate continues to rise and fall, the use of the stabilization fund must be carried out with caution.

A practical example fully shows that maintaining sufficient international reserves, especially foreign exchange reserves, plays an important role in maintaining the exchange rate of a country's currency or regional currencies and stabilizing foreign exchange and currency markets. This case is the Southeast Asian currency crisis that started in Thailand in 1997 and spread to countries such as Malaysia, the Philippines, Indonesia and Singapore.

On July 2, 1997, after months of turmoil in the exchange rate of the Thai baht, the Central Bank of Thailand finally abandoned the 13-year exchange rate system linked to the "basket" of baht and switched to a managed float. After the news was announced, the Thai baht exchange rate fell 16% against the US dollar, and the Thai financial crisis finally surfaced. Immediately after, the Central Bank of the Philippines was unable to withstand speculative attacks. On July 11, it announced that the exchange rate of the peso against the US dollar could be allowed to fluctuate within an unspecified "broader" range. to make. The currencies of countries such as Malaysia, Indonesia and even Singapore have also been affected by the "domino effect", and exchange rates have followed the trend. The Southeast Asian currency crisis broke out.

The reasons for the currency crisis in Southeast Asian countries are multiple. For example, in Fengguo, in addition to the country's related economic policies, especially monetary policy imbalances (the authorities opened the door to foreign capital and provided a large number of low-interest US dollar loans at home and abroad), and financial institutions overinvested in real estate (before the crisis, Thailand actually lent to Real estate funds accounted for 50% of total loans, Singapore accounted for 33%, Malaysia accounted for 30%, Indonesia accounted for 20%), bad bank debts (total bad debts of financial institutions totaled nearly 40 billion U.S. dollars), and high foreign debt (over May 1997 USD 80 billion, accounting for 49% of GDP), the current account balance of payments is too large (as of May 1997, the deficit had reached USD 16.4 billion, accounting for 8.5% of GDP), economic structure is not Reasonable, the relentless speculation of foreign exchange speculators, etc., there is another important reason is that the national foreign exchange reserves are quite limited and the use of reserve policy errors after the currency crisis broke out. Thailand's foreign exchange reserves in February 1996 were 38.7 billion U.S. dollars. These foreign exchange reserves were also attracted by Thailand's high interest rate policy (in 1996, Thailand's preferential interest rate has been at a high level of 13.25%, which is one of the highest interest rates in the Asia-Pacific region). The formation of foreign capital inflows. From February to May 1997, in order to stabilize the Thai baht, Thailand used 6 billion U.S. dollars of foreign exchange reserves, and the total foreign exchange reserves further decreased. The foreign exchange reserves of other Southeast Asian countries (except Singapore) are also very limited. For example, the foreign exchange reserves owned by the Malaysian Central Bank were only 28.35 billion US dollars by the end of June 1997, and Indonesia had only 19.9 billion US dollars of foreign exchange reserves by March 1997. Because the foreign exchange reserves of Southeast Asian countries are generally insufficient, when the currency crisis comes and the local currency is hit by strong foreign exchange speculation, there is not enough capacity to defend the country's currency. In addition, when currency crises occur, in the face of speculative offensives, the central banks of these countries continue to use foreign exchange reserves to intervene in the market regardless of their strength. As a result, the effect of intervention is low due to insufficient foreign exchange reserves. Inflict losses on reserve assets.

The difference between international reserves and international solvency

International liquidity, also known as international liquidity, in short, refers to a country's ability to pay externally. Specifically, it refers to a country's direct control or when necessary, can be used to adjust the balance of payments and settle international payments. Debt and all international liquidity and assets that support the stability of the local currency exchange rate. It is actually the sum of a country's own reserves (also known as the first reserve) and borrowed reserves (also known as the second reserve).

Therefore, the relationship between international solvency, international reserves and foreign exchange reserves can be expressed as follows:

First, the international solvency is the sum of its own international reserves, borrowed reserves, and induced reserve assets (see Table 1-2). Among them, its own international reserves are the main body of international solvency. Therefore, domestic academic circles also regard international reserves as narrow international solvency.

Table 1-2 International solvency composition

Second, foreign exchange reserves are the main body of its own international reserves, and therefore the main body of international solvency.

Third, freely convertible assets can be used as part of international solvency, or they can be included in the scope of general international solvency, but they may not become international reserve currencies. Only those convertible currencies that are relatively stable in value, widely used in economic and trade exchanges and market intervention, and have a special status in the world economy and monetary system can become reserve currencies.

Correctly understand the international solvency and its relationship with international reserves, make full use of international credit or the above-mentioned fundraising agreement for a country's monetary authority, and quickly obtain short-term

Foreign exchange assets to support their external payment needs are of great significance; for understanding some major developments in the field of international finance, such as the impact of European currency markets on the international solvency of some countries, the ratio of international reserves to imports in some developed countries has gradually declined Trends, as well as studying problems and reforms in the international monetary system are very helpful.