Change in use of forex reserves takes shape

The nearly $4 trillion in China's coffers will become a powerful tool for the country

Since the world economic crisis broke out seven or eight years ago, the many uses to which China's foreign exchange reserves can be put have frequently been discussed. As the value of the US dollar depreciated at one stage, reducing the size of foreign exchange assets, there were calls for China to reduce its holdings of US debt.

However, using China's foreign exchange reserves has never been a simple matter of financial calculation. Rather, it is closely related to the country's balance of payments and the many ways foreign exchange reserves are used. The country has recently made a breakthrough in this regard.

The central bank, the People's Bank of China, says foreign exchange reserves have fallen from a peak of $4 trillion last June to $3.8 trillion now.

Under the pressure of China and other commodity-producing countries dumping the dollar, global foreign exchange reserves fell from a record $12.03 trillion in August to $11.6 trillion last month, bringing the momentum of the rapid increase in the past 10 years or so to an end.

Though appreciation of the dollar has resulted in the depreciation of other reserve currencies such as the euro and the British pound, it is clear that after the average yearly rise of $824 billion in foreign exchange reserves over the past 10 years, the way central banks work, especially China's, has changed.

The net reduction of Chinese foreign exchange reserves in the second half of last year was the result not only of the country falling into line with the trend for international payments to be balanced but also of proactive measures being taken. With regards to the former, as reforms to marketize exchange rate and capital account convertibility have proceeded, together with the rapid growth of Chinese businesses' foreign investment, the long-term twin surplus in current and capital accounts in international payments has changed.

China's State Administration of Foreign Exchange says the surplus in the capital and financial accounts last year was $38.2 billion, compared with $326.2 billion in 2013. The total deficit from the second to the fourth quarter was $55.7 billion and the deficit in the fourth quarter was $30.5 billion. In this setting, the net reduction of foreign exchange reserves is reasonable.

As for proactive measures, there are many ways in which big changes have been made in the way foreign exchange reserves are handled. The government set about using them in a highly considered way, seeking to have more say in international politics rather than concerning itself with merely preserving financial assets and trying to ensure that they appreciated in value.

In September and October, 2013, President Xi Jinping proposed the strategic concept of building the New Silk Road Economic Belt and the 21st Century Marine Silk Road. In November, a policy covering these things, under the heading of One Belt, One Road, was included in the official document of the third session of the 18th Central Committee of the Communist Party of China, and is now being implemented.

Two important institutions, the Silk Road Fund and the Asian Infrastructure Investment Bank, have either been set up or are in the process of being set up. The latter has received the support of many European countries, including Britain, France, Germany and Italy. Moreover, China has played a leading role in other regional financial organizations such as the East Asian Foreign Exchange Reserve Pool, the BRICS Development Bank, the BRICS Contingent Reserve Arrangement and the Shanghai Cooperation Organization Development Bank.

The establishment of these international financial organizations led by China has marked a change in the way it handles its foreign exchange reserves, a blend of diversifying reserves and making them work in unison with other national policies and strategies for the most effective result.

In the case of the Silk Road Fund, the central bank has said it was formally registered in Beijing on December 29 with capital of $40 billion, 65 percent of which was from foreign exchange reserves. That is not a particularly large sum, but it does highlight where the fund's founding investment comes from.

For the time being, dollar assets, particularly US Treasury bonds, are where a great deal of China's foreign exchange reserves will be invested, because China cannot greatly reduce its US debt holdings, amounting to more than $1 trillion, in a short time.

However, changes in international and domestic markets are creating better opportunities for China to reduce dollar holdings to put its foreign exchange reserves to many other uses.

Implementing the One Belt, One Road policy and other national strategies is providing concrete ways in which this can be done, and in a way that is eminently controllable. Over the past few decades, rapid economic growth and the twin surplus in international payments have resulted in China accruing large amounts of foreign exchange reserves .

Over the next decade the nearly $4 trillion in foreign exchange reserves will become an important driving force for the country to promote regional economic integration and to gain more say in international politics, and facilitate the integration of the area along the One Belt, One Road region, bringing a rebalanced global economy closer.

As international payments continues to rebalance, and with the implementation of the One Belt, One Road strategy and other national policies, big changes are happening in China's foreign exchange reserves. In all of this, a net reduction in foreign exchange reserves and more investment in the countries and areas along the One Belt, One Road region will become the new normal.

The author is a senior researcher with Anbound Consulting, a think tank for public policy. The views do not necessarily reflect those of China Daily.