Foreign Exchange Market
The global foreign exchange (forex) market has ballooned in recent decades as more and more economies liberalise their capital accounts. The Basel-based Bank for International Settlements said average daily turnover in global forex markets was an estimated US$3.98 trillion as of April 2010.
When the world financial crisis broke in 2008, I wrote several columns for the official mainland paper The Global Times, politely criticising China's central bank for its ignorance of international politics and its mistake in accumulating excessive amounts of US debt, and wondering whether, as I put it, 'the Chinese people's sweat and blood money' could be wasted.
Now the official media, led by The Global Times, has initiated a heated debate over whether the central bank's foreign exchange holdings are in fact the people's 'sweat and blood money'. The reason for the debate is, of course, to defend the legitimacy of the government by defusing popular anger over its mismanagement of foreign exchange reserves. But it has backfired badly.
The paper invited several 'authoritative' central bankers and their associates to explain why the reserves are not 'sweat and blood money' and, more shockingly, that they do not even belong to the population because of the prior 'ownership transfer' from the people to the government. This is playing with fire; the arguments advanced by these so-called monetary experts appear so absurd that they have triggered popular outrage and demands for 'guarding against those who are supposed to be guarding the people's interest'.
The government's first argument is that the reserves are the property of the central bank, which 'purchased' them from the people 'by issuing renminbi to them'. Here the idea is to confuse Chinese entrepreneurs in the export business (mostly government related and who represent a tiny portion of the population) with ordinary citizens who not only have to exchange their sweat and blood for low wages, but also can only exchange a fixed annual amount (US$5,000) of foreign currency for personal use.
The second argument is that foreign direct investment in China - that is, the amount of foreign exchange that must be converted into renminbi - has nothing to do with export earnings, so there's no relation to the 'sweat and blood money'. Yet these monetary experts choose to ignore the basics of Western macroeconomics when it comes to a country's balance of payments. A country's ability to attract foreign direct investment and maintain a strong export position are connected and any attempt to delink the two hints at desperation.
The third argument seems the most ridiculous: since most the population does not have access to large amounts of foreign exchange and hence cannot participate in currency speculation, the authorities have to do it for them. But the basic requirement of any monetary management scheme should be that it gains in value, or at least doesn't lose money. The reality is that the State Administration of Foreign Exchange has been losing money on a large scale.
The truth is, in a real market economy, individuals can freely exchange their cash assets for foreign currency and they are also responsible for any losses or gains. The state monopoly in managing forex means that individuals could lose twice if they dare to hold foreign currency. Chinese have to sell their cheap labour to subsidise American consumer prices in exchange for expensive US dollars, and then use their renminbi holdings for even more costly foreign currencies. The State Administration of Foreign Exchange's operations are in fact not accountable to the citizenry.
Thus, despite the convoluted technical jargon employed by the central bank apologists, the logic of their argument appears crystal clear to ordinary citizens: the foreign exchange reserves question is none of your business, but earning them is your duty! This is politically explosive logic, triggering widespread speculation on the ulterior motives of the monetary elite in Beijing.
First, the central bankers cannot explain why diversification of reserve holdings has been talked about for years but never realised.
Second, the central bank's consistent rejection of increasing gold reserves over the years now appears very dubious, especially since the central bankers have stuck to the claim that it is unrealistic to purchase gold on a large scale, but only after the price has skyrocketed.
Third, China owns too many US government bonds and yet the central bankers have always discouraged the government from entertaining any thought of using them as diplomatic leverage in dealing with Washington. But throughout modern world history, using monetary instruments to achieve diplomatic aims is the norm rather than exception. One notable case was the Suez Canal crisis, when Washington threatened to stop market support for sterling to force the British withdrawal from the Anglo-French colonial expedition against Egypt's nationalist president Gamal Nasser.
It is thus not surprising that most people in China have increasingly come to believe that the central bank's obsession with its US dollar assets must be motivated by reasons beyond national interests. Official corruption is the first thing that comes to mind. Are there kickbacks involved for purchasing foreign bonds? In fact, the historical trajectory of official corruption is revealing, for it shifts over time from one sector to another. In the 1980s, at the beginning of reform, selling government import licenses was the key means of attaining wealth overnight; in the 1990s, during the so-called company 'marketisation' process, acquiring stocks of state enterprises proved the most effective way of accumulating a quick fortune. Now, we have reached a stage where huge windfalls can be more easily, quickly and secretly collected through the least transparent sector, the banking system. It is no surprise that the elite and their families have flocked to the financial sector in recent years.
Jiang Yong, a leading Chinese government analyst of financial securities, revealed recently he had been told that the dirty side of foreign exchange operations was much bigger than in the railway sector. It seems that China's monetary elite are scurrying around for ways to avoid a crisis, but this poorly organised collective denial of their errors in managing the 'sweat and blood money' shows their political vulnerability rather than strength.
Lanxin Xiang is professor of international history and politics at the Graduate Institute of International and Development Studies in Geneva