Implications of China’s Implications of China’s foreign exchange foreign exchange

reserves for the global reserves for the global economyeconomy

Andong ZhuAndong ZhuTsinghua University Tsinghua University

New Delhi, IndiaNew Delhi, India2008.12008.1

OutlineOutline

The Accumulation of Foreign ReservesThe Accumulation of Foreign Reserves The Sources of Foreign ReservesThe Sources of Foreign Reserves The Costs of Holding Huge Amount of FoThe Costs of Holding Huge Amount of Fo

rexrex What Can We Do with the Foreign ReservWhat Can We Do with the Foreign Reserv

eses Implications of China’s foreign exchanImplications of China’s foreign exchan

ge reserves for the global economyge reserves for the global economy

GDP Growth Rate of Chi na 1979-2006 (%)：

7. 6 7. 8

5. 3

9. 0

10. 9

15. 2

13. 5

8. 9

11. 611. 3

4. 1 3. 8

9. 2

14. 213. 9

13. 1

10. 9

10. 09. 3

7. 87. 68. 4 8. 3

9. 1

10. 010. 110. 210. 7

0

2

4

6

8

10

12

14

1619

7919

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

06

Forei gn Reserves of Chi na ($Bn) : 1978- 2007

0 1 - 1 3 7 9 8 3 2 3 3 6 11 22 19 21 52 74105140145155166212286403

610

819

1066

1528

- 200

0

200

400

600

800

1000

1200

1400

1600

180019

7819

7919

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

07

The Rapid Increase of ForexThe Rapid Increase of Forex2006 2007

Month Amount Month Amount

1 8451.8 1 11046.92

2 8536.72 2 11573.72

3 8750.7 3 12020.31

4 8950.4 4 12465.66

5  9250.20  5 12926.71

6 9411.15 6 13326.25

7 9545.5 7 13852

8 9720.39 8 14086.41

9 9879.28 9 14336.11

10 10096.26 10 14548.98

11 10387.51 11 14969.06

12 10663.44 12 15282.49

Forei gn Reserve, Forei gn Capi tal and NEX i n Chi na (Bn$)

18 23 31 39 49 59 70 81 100 139183231285 350408461520 570625681745 809883

- 200

0

200

400

600

800

1000

1200

1400

1600

1800

Reserve Forei gn Capi tal Accumul ated NEX by Chi nese fi rms

Who "Earned" Foreign Exchange for China wi th Trade (bn $): 1978-2006

-1 -3 -5 -5 -2 0 -2-16 -26 -28 -35 -41 -30 -19 -15 -28 -22 -12 -2

35

76100

118135

159176

198

291

456

-200

-100

0

100

200

300

400

500

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Accumul ated NEX by Forei gn Compani esAccumul ated NEXAccumul ated NEX by Chi nese fi rms

The Costs of Holding Huge AmounThe Costs of Holding Huge Amount of Forext of Forex

The Loss due to depreciation of USDThe Loss due to depreciation of USD The Colonization of the Chinese The Colonization of the Chinese

EconomyEconomy The Uneven rate of returnThe Uneven rate of return …………

Share in Industry Output by Share in Industry Output by Ownership (%)Ownership (%)

54.61 35.63 7.4856.17 32.99 5.5551.52 35.07 6.3247.01 34.02 9.8337.34 37.72 13.6933.97 36.59 15.1436.32 39.39 9.1531.62 38.11 11.728.24 38.41 9.01

0

10

20

30

40

50

60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Forei gn Owned SOE Col l ect i ve Domest i c Pr i vate

Foreign Capital’s Share in Different Industries in Foreign Capital’s Share in Different Industries in China:2005China:2005

Forei gn Capi tal ’ s Share i n the Output of Di ff erent I ndustri es i n Chi na(%)

0 1 2 48 8 10 11 11 13 15

1823 25 25 25 26 27 28 29

32 33 34 34 35 36 37 38 39 40 43 4346

53 5561 63

66

84

0

10

20

30

40

50

60

70

80

90

Manufacture of T

obacco

Mining and W

ashing of Coal

Mining and P

rocessing of Ferrous M

etal Ores

Mining and P

rocessing of Non-F

errous Metal O

res

Mining and P

rocessing of Nonm

etal Ores

Extraction of P

etroleum and N

atural Gas

Production and S

upply of Water

Processing of P

etroleum, C

oking, Processing of N

uclear

Production and S

upply of Electric P

ower and H

eat

Sm

elting and Pressing of F

errous Metals

Sm

elting and Pressing of N

on-ferrous Metals

Manufacture of N

on-metallic M

ineral Products

Processing of T

imber, M

anufacture of Wood,

Manufacture of M

edicines

Manufacture of S

pecial Purpose M

achinery

Manufacture of T

extile

Manufacture of R

aw C

hemical M

aterials and Chem

ical

Manufacture of G

eneral Purpose M

achinery

Manufacture of C

hemical F

ibers

Processing of F

ood from A

gricultural Products

Printing,R

eproduction of Recording M

edia

Recycling and D

isposal of Waste

Production and S

upply of Gas

Manufacture of B

everages

Manufacture of P

aper and Paper P

roducts

Manufacture of F

oods

Manufacture of M

etal Products

Manufacture of E

lectrical Machinery and E

quipment

Manufacture of R

ubber

Manufacture of A

rtwork and O

ther Manufacturing

Manufacture of P

lastics

Manufacture of T

ransport Equipm

ent

Manufacture of T

extile Wearing A

pparel, Footw

are, and

Manufacture of L

eather, Fur, F

eather and Related

Manufacture of F

urniture

Manufacture of A

rticles For C

ulture, Education and

Mining of O

ther Ores

Manufacture of M

easuring Instruments and M

achinery

Manufacture of C

omm

unication Equipm

ent, Com

puters

Share of Different Ownership in Different Share of Different Ownership in Different Industries in China:2005Industries in China:2005

0

10

20

30

40

50

60

70

80

90

100

National T

otal

Manufacture of T

obacco

Mining and W

ashing of Coal

Mining and P

rocessing of Ferrous M

etal Ores

Mining and P

rocessing of Non-F

errous Metal O

res

Mining and P

rocessing of Nonm

etal Ores

Extraction of P

etroleum and N

atural Gas

Production and S

upply of Water

Processing of P

etroleum, C

oking, Processing of

Production and S

upply of Electric P

ower and H

eat

Sm

elting and Pressing of F

errous Metals

Sm

elting and Pressing of N

on-ferrous Metals

Manufacture of N

on-metallic M

ineral Products

Processing of T

imber, M

anufacture of Wood,

Manufacture of M

edicines

Manufacture of S

pecial Purpose M

achinery

Manufacture of T

extile

Manufacture of R

aw C

hemical M

aterials and

Manufacture of G

eneral Purpose M

achinery

Manufacture of C

hemical F

ibers

Processing of F

ood from A

gricultural Products

Printing,R

eproduction of Recording M

edia

Recycling and D

isposal of Waste

Production and S

upply of Gas

Manufacture of B

everages

Manufacture of P

aper and Paper P

roducts

Manufacture of F

oods

Manufacture of M

etal Products

Manufacture of E

lectrical Machinery and E

quipment

Manufacture of R

ubber

Manufacture of A

rtwork and O

ther Manufacturing

Manufacture of P

lastics

Manufacture of T

ransport Equipm

ent

Manufacture of T

extile Wearing A

pparel, Footw

are,

Manufacture of L

eather, Fur, F

eather and Related

Manufacture of F

urniture

Manufacture of A

rticles For C

ulture, Education and

Mining of O

ther Ores

Manufacture of M

easuring Instruments and

Manufacture of C

omm

unication Equipm

ent,

State-owned/ control l ed Domesti c Pri vate Forei gn Owned

The Shanghai Stock Market The Shanghai Stock Market Composite Index:1991-2008Composite Index:1991-2008

0

1000

2000

3000

4000

5000

6000

7000

1991

0102

1991

0510

1991

0820

1991

1202

1992

0317

1992

0626

1992

1008

1993

0119

1993

0503

1993

0811

1993

1122

1994

0310

1994

0621

1994

0929

1995

0112

1995

0502

1995

0811

1995

1123

1996

0319

1996

0628

1996

1011

1997

0122

1997

0521

1997

0902

1997

1216

1998

0413

1998

0723

1998

1104

1999

0304

1999

0615

1999

0923

2000

0114

2000

0516

2000

0824

2000

1211

2001

0405

2001

0723

2001

1107

2002

0306

2002

0621

2002

1014

2003

0128

2003

0519

2003

0901

2003

1219

2004

0413

2004

0730

2004

1118

2006

0310

2006

0627

2006

1012

2007

0125

2007

0518

2007

0828

2007

1211

Take away Profits, Leave Take away Profits, Leave GDPGDP

and…and…

PollutionPollution

Pollution in the World:1999Pollution in the World:1999

The Uneven rate of returnThe Uneven rate of return

Foreign investment in China: 22%Foreign investment in China: 22% US Treasury Bond: around 5%US Treasury Bond: around 5%

What Can We Do with the What Can We Do with the Foreign ReservesForeign Reserves

Invest AbroadInvest Abroad Lending AbroadLending Abroad …………

Implications of China’s foreign Implications of China’s foreign exchange reserves for the global exchange reserves for the global

economyeconomy

For developing Countries:For developing Countries: Another source of Investment Another source of Investment

fund;fund; Another source of borrowingAnother source of borrowing with a more equal with a more equal

relationshiprelationship

Foreign Debt of Developing countries ($):1970-2004

0.0E+00

5.0E+10

1.0E+11

1.5E+11

2.0E+11

2.5E+11

3.0E+11

3.5E+11

4.0E+11

4.5E+11

5.0E+1119

7019

7119

7219

7319

7419

7519

7619

7719

7819

7919

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

04

East Asi a & Paci fi cEurope & Central Asi aLati n Ameri ca & Cari bbeanLow & mi ddl e i ncomeLow i ncomeLower mi ddl e i ncomeMi ddl e East & North Af ri caMi ddl e i ncomeSouth Asi aSub-Saharan Af ri caUpper mi ddl e i ncome

Implications of China’s foreign Implications of China’s foreign exchange reserves for the global exchange reserves for the global

economyeconomy

For developed Countries:For developed Countries: Another source of Investment Another source of Investment

fund;fund; Another source of borrowingAnother source of borrowing A competing lenderA competing lender A competing investorA competing investor

Implications of China’s foreign Implications of China’s foreign exchange reserves for the global exchange reserves for the global

economyeconomy

For the Global Economy:For the Global Economy: Strengthen the bargaining power Strengthen the bargaining power

of the developing countries?!of the developing countries?!