Foreign exchange reserves: a new challenge to China

Abstract

This paper discusses the challenge imposed by the Chinese government's unprecedented amount of foreign exchange reserves. Our cost and benefit analysis reveals that political considerations are more important than economic factors. Given its choice of gradual appreciation, the Chinese government will face social unrest in the long term that differs from what it faces in the short term.

Relationship between International Reserves and FX Rate Movements

“…As of April 2020, China had accumulated $3.1 trillion in foreign reserves, while the Asian countries' foreign reserves had also increased sharply, including Japan's $1.4 trillion, Hong Kong's $441.3 billion, Taiwan's $481.8 billion, and Korea's $404.0 billion [10]. In the midst of the increasing global financial imbalance, the surge in foreign exchange reserves in emerging economies has attracted the attention of academics, policymakers, and financial market investors and has generated several controversies [11]. As Bernanke [12] argued, an unprecedented amount of foreign exchange reserves contributed to excess savings that led to global imbalances, and it is closely related to the recent global financial crisis [12][13][14][15][16][17].…”

Relationship Between Exchange Rate and Foreign Exchange Reserves

“…Amid growing global financial imbalances, rising foreign exchange reserves in emerging economies have attracted the attention of research circles, policymakers, financial market investors and generated more controversy [7]. As Ben Bernanke argued, an unprecedented amount of foreign exchange reserves contributed to the excess savings, which led to global imbalances [2].…”