China’s Burgeoning Foreign Exchange Reserves

News reports this past weekend have it that China’s record as the country that owns the world’s largest foreign exchange reserves has not diminished at all. In the first quarter of 2007, it added a record $135.7bn to bring its total foreign exchange reserves to $1,202bn. This impressive increase beats the total of $247.3bn for the whole of last year. China’s economy continues to attract considerable foreign investment: A significant chunk of this new increase came from foreign direct investment, FDI to a total of $15bn and a trade surplus of $46.4bn. Analysts point out that as much as $25bn has found its way into China in this year alone. Also macro economic moves by the Peoples Bank of China, PBoC in its capacity as the country’s central bank have made and will continue to make this increase possible into the future. Such moves include arrangements with the country’s commercial banks that encouraged currency swaps aimed at retaining funds onshore. There are views also that calibrated gain in value by China’s currency; the renminbi could be attracting what The Financial Times calls “hot money” into China.

The announcement last year by China that it’d establish a new outfit to take charge of investing its expanding foreign reserves is where the rubber meets the tarmac for political economists who believe that how that new state investor goes about its responsibility would have far reaching political implications amongst others for many in the non-European world. If for instance, that outfit favors the practice of buying government bonds in the US, one implication will be that China will become a staunch behind the scene US well wisher. China would not want to be part of moves that would adversely impact the viability of the US economy, as it would not want to run the risk of not cashing the bonds that it holds when they mature. The other implication is that China’s role as a supporter of repressive regimes in the non-European world would be enhanced. China’s investment presence in parts of Africa and Asia where there are abusive regimes is already a fact. The expansion of that presence will bring a new dimension to the support that repressive regimes in the world receive from Western and North American corporations.

There is therefore no doubt that China’s growing economic presence in the world will certainly complicate the existing crisis in the capitalist world economy.