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Treat China’s trade surplus and foreign exchange reserve with a sense of reason
Source:China Daily Author:刘畅 Add Time:2011-12-13 00:00:00


Currently, there’s an opinion that China’s fast growing foreign exchange reserves is due to large foreign trade surplus, and our foreign exchange reserves caused more funds outstanding for foreign exchange and are not favorable for inflation-proofing. I would like to share my opinions concerning the issue.


Realistic understanding on China’s relatively large trade surplus at this stage

After joining the WTO, China obtained unprecedentedly fair and stable trade conditions, and its most favored nation status with WTO members has been solved. Over the past decade, China fully seized opportunities, expanded openness, realized rapid development of foreign trade, and greatly strengthened national power. China has become more and more important in bilateral and multilateral economic and trade patterns, and closer with other countries.

Internationally, China is an emerging economy, and it is inevitable for China to maintain fast foreign trade growth and surplus for a long time in its rapid development stage. The U.S. kept trade surplus for 94 years during the 100 years from 1871-1970; Germany gained surplus for consecutive 40 years from 1971 to 2010, and currently is the nation with largest trade surplus globally; Japan ran a trade surplus for consecutive 30 years from 1981-2010, and its trade surplus ranked first in the world for 20 years. China’s trade surplus lasted for only 17 years from 1994 up to now. Second is concerning the proportion in global exports. The highest proportion of U.S. exports was 21.5% in 1948. Even though, in recent 20 years, U.S. have transferred many of its industries to abroad, and deficit occurred in foreign trade, its export accounts for above 10% of global exports; the export of Germany, a nation with only a population of 80 million, made up of over 11% of global exports in the past 20 years; with a population of 1.3 billion, China exported less than 10% of the total, and surpassed 10% only until 2010. Third is export dependency (proportion of exports in GDP). From 1991 to 2010, Germany’s export dependency ranged from 19% to 39.7%, while China’s export dependency was 11.5 percentage points lower than that of Germany in 2010, though its highest one once reaching 35.7%.

Further, China is at processing link in global production chain, and its big trade surplus is from transvariations. In 2010, China’s trade deficit was US$47.25 billion, while trade surplus from processing trade was US$322.9 billion, 1.8 times of the total trade surplus. The features of processing trade are that import big and export big, and the big imports were not for home consumption. This can tell that a substantial amount of China’s trade was due to multiple accounts.

Currently, China should continue to give full play to comparative advantage in high quality and low cost rich human resources and seize opportunities to develop foreign trade. The income increase of residents is the basis to increase consumption. Only insisting on developing foreign trade, can we drive domestic production, maintain and expand employment, increase residents’ income, and gradually expand domestic demand and consumption, so as to make China’s economy be oriented by domestic demand. Foreign trade also boosted foreign investment in China and China’s outward investment, and enriched varieties of domestic commodities with increased quality and quantity through trade and competition between China and foreign countries. China’s developing of foreign trade is not only beneficial to domestic economy, but also conducive to world economic development. As to trade frictions, most of them can be handled with proper solutions.

We need to differentiate concepts of foreign exchange reserves and foreign exchange assets.

“Foreign exchange reserves” refer to convertible foreign exchange assets with high liquidity, including foreign currency cash, deposits and bonds held by monetary authorities (central banks). While “foreign exchange assets” refer to foreign exchange, gold (1738.70,-12.60,-0.72%), commodity reserves bought with foreign exchange and other overseas assets, falling into categories of government reserve assets and non-government foreign exchange assets. Government reserve assets include foreign exchange reserves held by the central bank, gold reserves, SDR, reserve position in the IMF, etc.

The foreign exchange assets of a nation are the demonstration of national economic power, while foreign exchange reserves are only a small part of it. Foreign exchange reserves are not the more the better. At present, China’s foreign exchange reserves account for about 60% of GDP, greatly higher than the international accepted 20%. The huge foreign exchange reserves mean great pressure on value maintenance of foreign exchange assets.

Balance of international payments surplus is the main source of foreign exchange reserves, but foreign trade surplus is not bound to bring about increase in foreign exchange reserves.

When balance of international payments are favorable, or to say when foreign trade surplus and net inflow of funds happens, if the central bank use home currency to buy foreign currency, there comes foreign exchange reserve. But if the central bank does not buy or buy less foreign currency, and leave it to enterprises and residents, then the foreign reserves will not increase or increase less. For instance, Germany ranked first in foreign trade surplus for many years, with an accumulated amount of US$926.9 billion from 2005 to 2008. However, its foreign exchange reserves in these four years did not increase, but decreased by US$7.4 billion to US$38.6 billion. The reason is that Germany's trade surplus turned to many kinds of foreign exchange assets through enterprises' outward investment. For example, German enterprises' foreign investment in 2007 was US$162.5 billion, equal to 60% of Germany's trade surplus of US$270.6 billion that year. Germany's experience tells us that, we can make the foreign exchange reserves not increase or increase less through all kinds of ways, when developing foreign trade.

We will focus on diversifying foreign exchange assets to make foreign exchange reserves remain at a reasonable level.