Why we need a large amount of foreign exchange reserves

    In the past, people emphasized the pragmatic role of forextradingwebsiteonlineternational forextradingbrokerwebsite, that is, real money to meet the needs of imports, debt payments cashback forex intervention in the foreign forex trading site market However, the series of crises that have occurred since the 1990s have changed the function of foreign exchange reserves to a considerable extent Li Yang analyzed These crises have brought inspiration:   First, developing countries in the real economy, the financial system in general there is vulnerability, and these factors are very easy to induce international speculative capital on a countrys currency impact Second, in the context of the gradual deepening of financial globalization, due to the international speculative capital scale is unusually large, developing countries rely solely on foreign exchange reserves to maintain a fixed exchange rate system, is futile Third, in the context of financial globalization, the small economies of small currencies have gradually lost the rationality of their existence      The Asian financial crisis has exposed the weakness of developing countries in terms of adhering to the fixed exchange rate system, and therefore, a global trend has formed to shift from a fixed exchange rate system to a floating exchange rate system which has also emerged in the middle of the problem  nbsp;   According to economic theory, under the floating exchange rate system, the intervention of national monetary authorities in the foreign exchange market will be greatly reduced, and do not have to keep a large number of international reserves, however, developing countries and countries in transition in the large-scale abandonment of the fixed exchange rate system, their foreign exchange reserves instead of a rapid increase in now, the worlds 3.5 trillion U.S. dollars in foreign exchange reserves, nearly 2/3 in Asia, while the dollar bloc, the euro bloc is massively reducing domestic reserves at the same time, developing countries and countries with economies in transition to exchange rate intervention than in the past  To explain these phenomena, the need to reconceptualize the function of reserves specifically, developing countries currently hold a large amount of foreign exchange reserves, mainly for the following three reasons  First, international reserves can Improve the credibility of monetary policy and stabilize exchange rate expectations According to the new theory, international reserves are not primarily for use, but to maintain peoples confidence in their currencies and maintain the governments ability to intervene in the market of last resort  In this new pattern, countries nominally abandon the fixed exchange rate system, but in practice, and through high foreign exchange reserves to maintain a relatively stable level of exchange rates, making it difficult for international speculative capital In addition, compared with the public commitment of the monetary authorities to exchange rate stability under the fixed exchange rate system, the non-public commitment of the monetary authorities to exchange rate stability under the floating exchange rate system after having high foreign exchange reserves is more credible  Second, sufficient international reserves can weaken the risk of currency substitution as long as the exchange rate is fixed. However, with a combination of a floating exchange rate system and high international reserves, currency substitution is not necessarily profitable, so it is less likely to occur. So far, many people commenting on Chinas financial system have felt bad as hell, but once they think that China still has more than $660 billion in reserves, peoples confidence in the system is greatly increased This is the international reserves as a reflection of the countrys financial strength  When it comes to Chinas international reserves, there are several issues that need to be clarified  First, there are four sources of Chinas international reserves. Current account surplus, capital account surplus, unidentified capital inflows, foreign currency deposits of domestic residents (including enterprises and residents) In Chinas foreign exchange reserve statistics, foreign exchange deposits in the hands of residents are not counted By the end of 2004, according to official statistics, this foreign exchange deposits of about 200 billion U.S. dollars, of which residents and enterprises each account for half In addition, according to the Federal Reserve estimates, there are about 100 billion U.S. dollars In addition, the Federal Reserve estimates that there is about $100 billion of cash in circulation in China These foreign exchange funds are historically accumulated, and their sources are difficult to say  Originally, this foreign exchange funds in the hands of the people, residents generally do not use to exchange into RMB However, in recent years, the RMB appreciation of the argument is incessant, making people fearful, where there are rumors of RMB appreciation, it will cause the net reduction of foreign exchange deposits of residents in the banking system The money is sold to Banks, banks and then sell back to the central bank, forming an increase in foreign exchange reserves, and, this increase in foreign exchange reserves is not reflected in the balance of payments statement of the year  Second, the earnings of international reserves recently, the community about the international reserves of many claims, saying that Chinas reserve earnings are very low, the accumulation of so many reserves is purely wasteful because the number of reserve earnings is absolutely confidential, the monetary authorities are unlikely to come forward To clarify, the general public also do not know the truth but, through Chinas balance of payments statement of investment income flow figures to indirectly speculate on the state of Chinas foreign exchange reserves earnings should be said, Chinas foreign exchange reserves earnings are very good, the anecdotal evidence is not reliable  However, it is not to say that the substantial growth of foreign exchange reserves without any problems he said, there are two main problems: First, the impact on monetary policy is too large It is through the foreign exchange account to make a massive increase in our money supply, and we now lack the means to hedge; second, the high growth of foreign exchange reserves and by it led to a lot of problems, leading to China and many countries in the world, mainly developed market economies, increased economic friction; third, is the currency risk of foreign exchange reserves in addition to other macroeconomic policy coordination issues, and so on & nbsp nbsp; According to the above analysis, the massive increase in foreign exchange reserves of developing countries and countries with economies in transition may be a long-term phenomenon, as long as the Asian region does not establish some form of monetary union, as long as the global monetary system is not unified, in addition to the United States and the European Union countries, other countries and regions, including Asian countries and regions in particular, must hold large amounts of foreign exchange reserves  In other words, to change the current state of affairs, the fundamental solution, first, the formation of a new international monetary system, the formation of a new way of generating international reserve assets; second, the formation of an Asian currency area, in order to compete with the two major currency areas of the dollar and the euro This is our task for a considerable period of time in the future, in view of this, we must attach great importance to the establishment and development of economic, cultural and political ties with our neighboring countries and regions