China Review News (CRN) recently published an article discussing how China should manage its large foreign exchange reserves. The article started by comparing China with Japan and Germany, two countries that also have large foreign exchange reserves. The ratio of net privately owned assets versus total foreign exchange reserves in Japan is 56%; in Germany it is 86%; and in China it is 50%. The article suggested that China should establish new policies to allow privatization of the ownership of foreign exchange and assets. The author offered four actionable items: (1) establishing a foreign currency based bond market that limits trading to domestic customers; (2) allowing foreign companies to issue bonds in Chinese currency; (3) with some restrictions, allowing domestic residents to invest directly in foreign markets; (4) loosening up the restrictions on Chinese companies’ international investments. The author expressed the belief that a certain level of privatization of foreign exchange reserves will lower the government’s foreign exchange management risks and will also lower the pressure of issuing more Chinese currency.
Source: China Review News, August 6, 2012