Exchange rate or forex reserves: China needs a more balanced way

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By CGTN's Gao Songya

China’s forex reserves dropped rapidly from 3.8 trillion US dollars to just over three trillion in the past two years, as the People's Bank Of China (PBOC) has been gradually selling its US dollars to buy more yuan in slowing down the devaluation of the RMB.

Zhou Xiaochuan, governor of PBOC, said that China does not want that much forex reserves during Friday's press conference on the sidelines of the annual parliamentary session, and that policy makers don't need to overreact to the decline.

"China now still holds the world's largest forex reserve stockpile, much higher than the runner-up, [Japan]" the governor said.

CFP Photo

However, Huo Deming, a professor from Peking University, said that theoretical thinking over the forex reserve issue is not enough, as there is huge ongoing capital outflow behind the forex surplus.

Zhou Hao, director and senior emerging markets economist at Commerzbank, agrees that the fast decrease in China's forex reserves is a big problem.

"China's currency account and financial account are running deficits, even with the forex reserve surplus, and the PBOC has to intervene using the forex reserve," said Zhou. “So the PBOC has to think about what is a sustainable strategy and how to balance between exchange rate and a stable forex reserve.”

"At the end of the day, China should have a more managed floating exchange rate regime, as well as a more open capital account in order to find a balance between economy growth and the exchange rate," Zhou said.

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