At the end of March 2011, China’s foreign exchange reserve has surpassed $3 trillion. This occurs within 1 year of China’s foreign exchange reserve exceeding $2 trillion for the first time.

China’s Central Bank – the People’s Bank president Zhou, Xiaochuan indicates that China’s foreign exchange reserve has passed the level of what the country needs. He says that excessive accumulation of foreign exchanges can lead to excess liquidity and raise the Central Bank’s hedging burden.

China’s Foreign Exchange Center announced on April 29, 2011 that inter-bank RMB  yuan exchange rate is $1 US against RMB ¥6.4990 that day. This is the very first time that RMB exchange rate drops below the $1 US to RMB ¥6.50 mark. Below is a chart of RMB exchange rate in recent months:

   

There are many protesting voices in China claiming that the appreciation of RMB against US dollar causes significant losses of China’s foreign exchange reserves.

However, China’s Foreign Exchange Reserve Administration states that since the government does not need to sell foreign exchanges in large scale at present, the book value fluctuations caused by the exchange are not real loss or gain and make no direct impact on the purchasing power of the foreign exchange reserve.

The government agency points out that the foreign exchange reserve’s purchasing power is affected by the profit generated by the foreign exchange reserve and the inflation rates of the countries that the reserve is invested in. From 2000 to 2010, the Consumer Price Index (CPI) have average annual growth rate of 2.4%, 2.1% and -0.2%, respectively, in US, Europe, and Japan; whereas China’s foreign exchange reserve has maintained a much higher profit rate comparatively. As a result, the real purchasing power of China’s foreign exchange reserve has not declined.  

Where is China’s exchange rate going? Will it keep dropping as US has hoped? The impact to China’s export industry and employment in the industry can be considerable. As a result, the exchange rate will continue to be closely controlled by the government and maneuvered as a chip in international negotiations.

 

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