Best Use of China's Reserve: Selling It

An article in iFeng calls on China to stop selling foreign reserves and use the money for investment.
iFeng: 中国外储最好的用途就是被卖掉?
Some scholars believe that the nature of the accumulated foreign exchange reserves of China, and the nature of Norway, Saudi Arabia and other oil-producing countries to accumulate foreign exchange reserves, there are significant differences. In terms of the oil-producing countries, through the sale of domestic resources to earn foreign exchange reserves by the transfer of their natural resources and the accumulation of wealth can be used freely. Government either to the foreign exchange reserves into sovereign wealth funds to invest in overseas, the foreign exchange reserves to be distributed to its own residents. For China, there are two main sources of foreign exchange reserves. First, the increase in foreign exchange reserves is due to the continuing trade surplus caused, that exporters choose to export dollars acquired to sell Bank of China; second, to increase foreign exchange reserves due to continued capital inflows caused, that resident or Select the dollar inflow of non-residents sold China's central bank. No matter what the source of the above, the central bank with the RMB to buy foreign currency through the formation of foreign exchange reserves. Thus, in the opinion of these experts, China's central bank foreign exchange reserves accumulated through money creation in nature is not China's wealth, while the fund is similar to an asset management company. Investor demand redemption is the most natural. Further, for such accumulated foreign exchange reserves, the best use is to be sold on the foreign exchange market.

...However, in order to exchange rate stability maintenance. These easily spend foreign exchange reserves is also a resource mismatch. In fact, the central bank continued to open in the current context the result of market intervention, is that in the background of the RMB against the dollar, with the US dollar assets continue to exchange RMB assets, which will result in a new round of welfare loss. We believe that a better way to spend foreign exchange reserves, with foreign exchange reserves to buy overseas resources, advanced technology and human capital, global foreign exchange reserves or by direct investment, or participate more actively in the global and regional financial cooperation with foreign reserves Wait. Just to exchange rate stability maintenance had cost so valuable foreign exchange reserves, worth as a strategy.
Although the value of the currency is currently declining as dollars are sold out of reserves, paying those dollars out of reserve is exactly what they are there for, they function similar to gold in the old gold standard. The yuan rises as it accumulates dollars and it falls as those dollars are bought back, the value of the currency can naturally rise and fall based on the market.

Where China ran into trouble (starting in 2011) is where the nations on the gold standard ran into trouble following World War I, mainly the United Kingdom. It returned to the pre-war exchange rate even though money creation soared during the war. The United States had a relatively undervalued currency as a result and due to the emerging special relationship at the time, cooperated with the United Kingdom, ultimately setting up an incredible credit bubble in the United States as exports and credit flowed out, and investment flowed in. China was in a similar position to the United States in the 2000s, undervaluing its currency versus the U.S. dollar. Exports soared, credit expanded overseas (mainly U.S. Treasury bond purchases) and investment flowed in. Gold was the standard in the 1920s though. The U.S. dollar depreciated in the 2000s, helping create a far larger credit bubble in China than the United States experienced in the 1920s. China also kept appreciating the currency right until the start of 2014.

Whether investments pay off doesn't matter, the immediate impact of drawing down reserves would be a downward revaluation of the yuan since yuan holders would have less reason to expect they will be able to exchange yuan for dollars at market rates. Given China's penchant for poorly timed investments in commodities, it's also possible they would end up making more pro-cyclical investments that would cause an even greater currency adjustment down the road.

As under the gold standard, reserves are accumulated as the currency appreciates and then are sold down as it depreciates. If far to much money is created, as has happened in China, then the currency experiences a devaluation and resets to a new trading range.

Outflows may increase again as the PBoC steps up intervention: PBOC Seen Overriding Yuan Market Moves to Limit Depreciation
The yuan advanced the most in two weeks, with the central bank’s daily fixing adding to signs that China’s authorities are prepared to overrule the market to control the currency’s moves.

The People’s Bank of China strengthened its reference rate, which restricts onshore yuan moves to 2 percent on either side, even as the dollar advanced the most since July 5. This spurred speculation that the central bank isn’t sticking to its stated policy of following the direction of the market, which would have resulted in a weaker fixing.

“China does not want to see a rapid yuan depreciation, at least for now, because that would spur speculative traders to short the currency,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “The yuan bears are all waiting for an opportunity to come. If the yuan weakens beyond 6.7 a dollar, it could reach 6.75 quickly, and we’ll start to see reports about it hitting 6.8.”
Good news for anyone who wants to sell their yuan, the PBoC will pay you a premium for your yuan and sell you dollars at a discount.

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