China’s Foreign Account Surplus Problems
The following article was translated from Modern Weekly:
“Reducing China’s Burden”
The excessive foreign account surplus is turning into a burden. How to “reduce China’s burden” is becoming one difficult problem that the Chinese government is facing.
Chinese Government – “We Have Too Much Money”
The Chinese government released a sigh of “too much money is really annoying” recently, as China’s foreign account surplus rapidly increased: It is already up to US$955 Billion, while that of the entire Asian region has reached US$3 Trillion.
The problem vexing the Chinese central bank is two-fold. On the one hand, the account surplus is accumulating at a dizzying rate; currently about US$20 Billion is added every month, and in order to maintain a stable Chinese currency conversion rate, China must buy US Dollars. On the other hand, while the continuing accumulation of foreign funds may reflect China’s growing economic strength, the return on these non-Chinese assets is somewhat limited.
(Not) Using China’s Foreign Account Surplus for Infrastructure
If China were to put the accumulated foreign account surplus into action, some knotty problems would probably occur. China has already poured US$60 Billion into the reorganization of banking assets, but if it were to invest money in basic infrastructure, it would run counter to the effort that has been put forth by the Chinese government to make restrained investments. Furthermore, looking at examples such as steel factories and high speed train projects, it is clear that the return on American debt is higher than on some of China’s investment projects.
If the funds were diverted to other investments by selling US dollar assets (according to statistics this portion of China’s foreign account surplus is in the range of 70%), it is possible that the total value of the current investments could weaken. Looking at this from another angle, a big purchase may push up the value of the account surplus, but the results would be limited. Taking gold as an example, even if China increased its current store of 600 tons of gold by adding two times its current amount [for a total of 1800 tons of gold], it still wouldn’t have spent even the amount of foreign currency reserves it accumulates in one month.
No matter how you look at things, the amount of cash that is currently held by Asian central bank easily surpasses the amount they would need in the worst possible crises. This has prompted Singapore to take out a portion of their cash to use in more radical investments. What China ends up doing will be a test for the Chinese government.
The article suggests that it is necessary to keep the currency rate stable, but does not provide any why to the reader (which is typical in many Chinese articles). This is strange as the accumulation of foreign reserves by the Chinese government seems to be seen as a bad thing in this article. If it is bad, why not just let the Chinese currency appreciate?
Return on US Debt Higher than Other Investments in China
One other thing that pops out from the article is that the return on US debt is said to be higher than the return on things such as Chinese infrastructure investment. Perhaps this has been true in the past, but if the value of your currency is rising relative to the dollar will it remain true? How about if the level of US debt is unsustainable without either high inflation or a cutback in consumption (both of which would hurt China) to lessen its load? Why these questions are not asked is any one’s guess… what do you think?