This week the expert panel was asked to address interesting and vexing questions on often misunderstood issues. Mark Matthews (head of research for Asia, Julius Baer) was asked: What do China's foreign reserves mean to its national wealth? Can they be regarded as savings, or are they something else? Savings, by definition, means money that is preserved by low-risk means, Matthews says. They differ from investment, which is money that seeks to grow and therefore requires some risk taking. We could, therefore, call China's foreign reserves a stock of national savings in the sense that only a small portion (about US$200 billion of US$3 trillion) is in sovereign wealth funds and therefore invested in risk assets like equities. Most of China's foreign reserves (about 70 per cent) are in safe, low-yielding US dollar-denominated assets and hence can be considered savings. However, we also need to ask ourselves why these foreign reserves exist in the first place. They exist because the country bought the earnings of its exporters. If it had not done so, with more exports than imports, the yuan would have appreciated much more than it has, and many of China's manufacturers would have been driven out of business or forced to relocate to other countries. To finance those purchases of dollars, China had to borrow in yuan. That means there is debt against the foreign reserves. So they should not really be called savings. They are a current account surplus that has not been corrected by currency appreciation. Carl Berrisford (analyst, UBS Wealth Management Research) was asked: What is quantitative easing, and how does it affect markets? Under conventional monetary policy, a central bank buys short-term bonds to lower short-term rates, Berrisford says. However, when short-term rates are close to zero and fail to stimulate the economy, other means are needed to boost economic activity. US Federal Reserve chairman Ben Bernanke prefers to use the term 'long-term asset purchases' instead of quantitative easing. This describes a process by which the Fed buys up longer-dated government bonds (Treasuries) with a pre-determined quantity of cash that it may or may not need to 'print'. This has the effect of directly swapping banks' bond holdings for cash, thereby raising the banking system's reserves. Under the money multiplier model, banks are then required to lend more, to avoid accumulating excess reserves that would earn them no income. It has been argued that, before quantitative easing (QE), the US banking system's loans had not really been constrained by reserves. The problem was that debt-laden and unemployed US consumers had little appetite to borrow, however cheap or available loans were. But QE has another important effect: large-scale buying of long-term government bonds drives up the bonds' prices and lowers long-term rates. Since the 10-year bond rate serves as the risk-free rate, lower risk-free rates raise the prices of risky assets such as equities. This stimulates asset inflation - for example, raising the price of commodities - with a knock-on effect on economic activity. Lower long-term rates also give companies the security to fund longer-term projects and lower the bar for projected internal rates of return. Another side effect of QE tends to be a weakening of the currency, which ought to stimulate a country's exports. Therefore, the overall effect of QE should go beyond merely stimulating short-term liquidity.