Expert Opposes Handing Out Forex Reserves to China's Citizens

BY    2013-05-06 20:11:03

  (Beijing) – There has been much discussion recently about making more efficient use of the country's foreign exchange reserve, which has climbed to more than US$ 3.4 trillion as of April.
  One eye-catching idea advocates directly handing out the reserve to the people.
  However, Zhang Bin, a research fellow at the Institute of World Economics and Politics, which is under the Chinese Academy of Social Sciences, opposes the proposal. He stated his ideas in an article published by China Reform, a Chinese-language sister magazine of this publication.
  Zhang opposition mainly stemmed from his concern about maintaining the stability of the yuan exchange rate. He also doubted that the general public would be willing to hold forex in lieu of yuan given the yuan's prospect of continued appreciation.
  That said, handing out a small portion of the forex reserve made sense, he said, because the central bank could still retain influence over the forex market and the Chinese would want to diversify their investment portfolios if the yuan was allowed to fluctuate with greater flexibility.
  To make the best use of forex reserve, Zhang suggested using some of it to create a sovereign wealth fund dedicated to caring for the elderly. The return on investments of the fund could be used to pay pensions, he said.
  Though this model still involves converting foreign currencies to yuan, which potentially adds pressure to domestic inflation, it was still superior to a one-time handing out of the forex reserve to the people because pension payments are made over a long time, he argued.
  "With progress in reforms to the exchange rate system and the capital account, even that would not be an issue," he added.

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