The fast pace of China's accumulation of foreign exchange reserves caught worldwide attention as the country recently became the world's largest reserve holder with more than US$1 trillion.

To many, such a stunning amount in foreign exchange reserves is not in China's interest as it will lead to losses in national welfare, increased financial risks and high prices if it continues. Therefore, they argued, part of the reserves should be used to establish strategic resource reserves, assist technological upgrades of State-owned enterprises, push reform of financial institutions, fill the gap in the social security fund or even finance the low-cost housing programme.

Those suggestions, as Wu Xiaoling, vice-governor of the People's Bank of China, the central bank, said, ignore the fact that the foreign exchange reserves are bought by the State by providing basic money and are not fortunes that can be poured freely into policy programmes.

In other words, foreign exchange reserves, unlike tax revenue, cannot be taken as a means to transfer payments. They are recorded as liabilities on the balance sheet of the central bank and if they were used for domestic expenditure, the bank's balance sheet would not change and the liabilities would remain.

If we do not consider issues such as the country's ability to make international payments or prevent financial risk, the large amount of reserves in itself would not be seen as a serious menace.

China has a population of 1.3 billion, which means a Chinese on average shoulders only less than US$1,000. But this meagre amount is nothing to worry about.

Moreover, China is a large, transitional economy and the risks and fluctuations that may possibly emerge during the process of transition are certainly more severe than those mature market economies or economies of smaller scale. In this sense, China's foreign exchange reserves, although as large as US$1 trillion, should not become a cause for concern, but rather they can provide an anchor for the country's economic transition.

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