There Is No Psychological Barrier for Amount of Forex Reserves, Says China's Senior Central Bank Official
Chen Juan
/SOURCE : Yicai
There Is No Psychological Barrier for Amount of Forex Reserves, Says China's Senior Central Bank Official

(Yicai Global) Nov. 29 -- The gradual decline of China's foreign exchange reserves in recent years has caught the attention of the market, as USD3 trillion is regarded by analysts as an important forex reserve benchmark. The main purpose of foreign exchange reserves is to meet the needs of real economy and trade and investment, said Lu Lei, a senior official of China's central bank, the People's Bank of China (PBOC). There is no psychological barrier for the sum of foreign exchange reserves, Lu underlined.

Lu Lei, director-general of the research bureau of the People's Bank of China and deputy director of the State Administration of Foreign Exchange (SAFE), made the above statement at Caijing Annual Conference 2017 today. Reserve assets differ from the general state-owned financial assets, which are expected to maintain and increase their value, he emphasized. The main purpose of reserve assets is not to preserve and increase their value but to meet the country's needs.

The management of foreign exchange reserves has become an important starting point for the implementation of macro-prudential management, Lu reminded. Proper and timely hedging operations according to the needs of trade and investment are an important means of maintaining the foreign exchange market. The role of foreign exchange reserves in the foreign exchange market is very important for the emerging market countries with economies in transition and a growing economy.

As for managing foreign exchange reserves, Lu said that acquiring foreign exchange reserves is not a kind of tax obligation of the citizens to the government. On the contrary, the increase in reserves comes from enterprises and residents attitude towards foreign exchange settlement. Recently, there are some suggestions to use debt to buy foreign exchange reserves, Lu noted. It is concerning that there could be a mismatch between the long-term fixed maturity of debt and the immediacy of foreign exchange in the foreign exchange market, which is not the blessing of market stability, he warned.

Since the central bank cannot issue bonds, it can only hedge its huge foreign exchange reserves by expanding M0, the narrowest gauge of money supply, resulting in such problems as the expansion of M2, real estate bubble and funds flowing from real economy to the financial market, said Huang Qifan, vice chairman of the economic and finance committee under the National People's Congress (NPC). Therefore, the current practice of foreign exchange reserves managed by the central bank should be changed to "dual" management by the ministry of finance and the central bank, he suggested.

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Keywords: Pboc , Forex Reserve