Wednesday 15 December 2004

China states stand on foreign exchange reserve

The People's Daily Online has an article about how China manages its foreign exchange reserve. The following paragraphs attributed to a Chinese government spokesman were especially interesting:

China carries out the handling for the foreign exchange reserve structure in accordance with the long-term and strategic structure standard without taking the advantage for profiteering from a short-term exchange fluctuation. If not to engage in the exchange of currencies or not to use them actually the increase or decrease of the value brought about by the changing of exchange rates for the reserve can only be indicated in account and will not have any immediate effect of gains or losses...

The foreign exchange reserve held by the central bank (PBOC) is fundamentally for maintaining a macro-economic stability... It is not only good for strengthening the international settlement...but also good for coping with the unexpected events, preventing from the happening of systematic financial risk and maintaining the security of the national economy.

It is sure that certain amount of cost is necessary for the keeping of foreign reserves... However, should the overall macro-economy or financial system be mired into a vibration or even crisis the whole country and society will have to pay a hell lot of cost for it... So far as I know the financial situation in the central bank (PBOC) go fine and there is no such thing as the loss suffered as the media put it.

What this means is that China is prepared to face forex losses for the sake of macroeconomic stability. So don't be too ready to assume that the renminbi peg will go any time soon.

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