Zhang Anyuan, the Director of the Office of Fiscal Finance at the Economic Research Institute of the National Development and Reform Commission, proposed two approaches to use regarding China’s foreign reserves. “Rather than watching our foreign exchange reserves shrink in value, we should use them to solve domestic problems.” The first approach is to “convert financial assets into reserves of resources,” whereby China encourages the exploration but limits the production of oil, coal, iron ore, and non-ferrous metals. This would increase their imports, reduce the foreign exchange reserves and keep the reserves of resources available in China. The second approach is to “inject funds into local financial entities so as to increase their credit ratings.” According to Zhang, local financial entities have entered into the peak period when payments are due on the government bonds they previously issued. Some of them may face a high probability of liquidity risks. Such an injection of funds will help improve their credit ratings so that these local financial entities can issue more bonds, domestically or in Hong Kong, to solve their liquidity problems for the payments on the bonds they previously issued.
Source: Modern Bankers reprinted by Sina.com, January 19, 2012
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