Opinion | China needs market discipline to manage its foreign exchange wealth
Hu Shuli says the government must look at restructuring its sovereign investment companies to compete on the global stage for better returns
While an appreciating renminbi may have taken the sting out of the Sino-US currency quarrel, the issue has not quite gone away. Come the autumn, when Chinese leaders meet over major reforms, we can expect the liberalisation of exchange rates to accelerate.
How to put the country's foreign exchange reserves to better use is also likely to be on the agenda, following the State Council's recent call for their innovative use.
The growth of these reserves, from US$600 billion 10 years ago to US$3.5 trillion as of June this year, has been stunning. As the biggest holder of US dollars, China must carefully consider how it may best use them.
This vast sum is no windfall, of course, as it reflects renminbi liability. And the costs to maintain the exchange rate system have also been high. To manage it properly, China must draw on the successes of other economies and build for itself a system that works.
First, a change of mindset is due. Foreign exchange reserves are generally seen as savings that could be used in times of crisis, to pay off exports and foreign debt if needed. Thus, when considering ways to invest them, safety is prized over high returns.
But because of the size of China's reserves, a freer hand is possible: the government could keep, say, US$1 trillion as savings to ensure liquidity and meet short-term needs, and invest the rest for returns.