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China Expands Easing of Capital Controls on Exporters
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Chinese exporters are required to bring their revenue in dollars after covering costs such as imported materials, back into China, exchanging it with the central bank for yuan. This foreign currency is the main source of the Chinese foreign exchange reserves of $2.6 trillion. The system was based on an earlier period when China worried about capital outflows. Now with rising inflation, and a lot of money circulating in the economy after the recent stimulus and huge lending surge, China is rethinking this practice. Hu Xiaolian, vice governor of the People's Bank of China, says it makes it harder to control liquidity levels in China in todays situation.Because of this China's government is easing controls and letting exporters keep more of their revenues earned overseas. However with the expected declining value of the dollar Chinese exporters may prefer to convert their dollars into yuan. Some companies may want to accumulate dollars and other overseas foreign currency for investments abroad. The difference with Japan is striking. For Japan, also a major exporter, the bulk of foreign currency assets are held by companies, which are available for use to invest in manufacturing and other assets. By concentrating these decisions in the state, China has accumulated a huge reserve of foreign exchange. But this also creates major problems as China is concerned about the impact of the declining dollar on its huge holdings of US treasury debt.
China's foreign exchange reserves and problems with inflation
05/09/2006
A recent IMF study points out that China's $3 trillion foreign exchange reserves are twice what China needs for traditional purposes such as supporting the economy in a financial crisis. According to China's central bank governor these reserves are making it difficult to control inflation. Experts also say this makes little sense for a developing country with low percapita incomes. Most of this money is invested in U.S. Treasury securities and is not put to productive uses.
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