• 2024-05-26
• News

3.3 Trillion Forex Reserves May Deplete Soon

In the torrent of information in today's globalized world, various economic issues frequently emerge in the public eye, with discussions on foreign exchange controls being particularly eye-catching. Recently, on a social platform, a netizen posed a profound question: "What would happen if China completely abolished foreign exchange controls?"

This question not only touches the sensitive nerve of financial policy but also triggers deep contemplation among all sectors of society about national economic security and the free flow of personal assets.

Firstly, to understand why foreign exchange controls are still necessary at this stage, we must review history and learn from it. In the 1990s, Southeast Asian countries such as Thailand and the Hong Kong region, without adequate preparation, recklessly opened up their foreign exchange markets, resulting in a fierce impact from international capital, known as the "Asian financial crisis." These events warn us that the liberalization of the foreign exchange market should be cautiously advanced to avoid systemic financial risks caused by disorderly capital flows. Therefore, China's prudent attitude towards foreign exchange management is partly due to a profound reflection on past crises.

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In addition to guarding against external shocks, foreign exchange controls also play a crucial role in safeguarding the security of the country's foreign exchange reserves. As the "ballast stone" of a country's economic security, foreign exchange reserves have an irreplaceable role in stabilizing exchange rates and resisting external financial risks.

In today's society, there are some people who dream of "smoothing out," but they often stop because their assets are difficult to transfer abroad smoothly. However, if foreign exchange controls were abolished and people were allowed to freely exchange foreign currencies and transfer them abroad, the situation might undergo a drastic change.

Imagine, there are quite a few families nationwide with real estate worth more than 10 million yuan. If they choose to sell their properties and convert the proceeds into US dollars, they could obtain approximately 2 million dollars. This amount of money is enough to maintain a very good standard of living in most countries around the world. It is important to know that in developed European and American countries, the average annual income of middle-class families is only between 100,000 and 150,000 US dollars.

If foreign exchange controls were really relaxed, how many families would choose to transfer their assets abroad and immigrate? Let's imagine a scenario: the four first-tier cities of Beijing, Shanghai, Guangzhou, and Shenzhen, plus several second-tier cities with strong economic strength such as Hangzhou and Suzhou, a total of 500,000 families with properties worth more than ten million yuan have the idea of immigrating overseas. If these families decide to sell their properties and convert them into US dollars, it would consume about 1 trillion US dollars in foreign exchange reserves.

What is more concerning is that once the capital account is fully liberalized, funds in the domestic stock market, bond market, and various financial products may usher in a trend towards the US stock market. This is not baseless; looking back at the development of the US stock market over the past ten, twenty, or even thirty years, its trend has been continuously rising, setting new highs repeatedly. Even without directly investing in individual stocks, simply investing regularly in the Dow Jones or Nasdaq index funds can yield quite considerable stable returns.

Such investment opportunities undoubtedly pose a great attraction to domestic investors. In this regard, our East Asian neighbor Japan provides a vivid example. In Japan, there is a group known as "Mrs. Watanabe," who are usually housewives who invest in financial management while taking care of household chores. The investment strategies of these "Mrs. Watanabes" are quite distinctive: they borrow yen from domestic banks in Japan, then exchange it into US dollars, and finally invest in the US stock or bond market.It is foreseeable that if China fully liberalizes foreign exchange controls, similar investment behaviors are likely to re-emerge domestically, and even on a larger scale. Once the Chinese version of "Mrs. Watanabe" and even "Mr. Watanabe" appear, the foreign exchange demand stimulated by overseas asset investments, we also estimate it at 1 trillion US dollars. Adding to this the foreign exchange demand generated by domestic middle-class families who wish to sell their properties and immigrate overseas, the total required would be 2 trillion US dollars.

As of the end of September this year, China's foreign exchange reserves have been maintained at approximately 3.3 trillion US dollars. While this number sounds substantial, without the implementation of foreign exchange controls and without a significant devaluation of the renminbi, the foreign exchange reserves could be consumed in a relatively short period and might even rapidly decrease to a state of depletion.

Some may question whether it is possible to ensure the safety of foreign exchange reserves while achieving the full liberalization of the capital market. From the current situation, achieving this balance is quite challenging. If forced to proceed, it may require sacrificing the renminbi exchange rate as a price, leading to a rapid devaluation of the renminbi due to the surge in foreign exchange demand, which could trigger more profound negative impacts.

A prerequisite for completely abolishing foreign exchange controls is that the demand for foreign exchange by residents no longer has a significant impact on foreign exchange reserves. In simpler terms, it means that the public no longer has the intention to emigrate on a large scale or transfer assets.

Taking Japan as an example, despite its high degree of capital mobility, there has not been a large wave of immigration or asset outflow. This is mainly because Japan is not inferior to other countries in terms of material life, social welfare, and employee income. The general public believes that staying in the country is more appropriate than living in an unfamiliar environment, and even if they immigrate, there may not be an improvement in the standard of living.

Similarly, many European countries, as well as Canada, Australia, and even Hong Kong in China, do not have strict foreign exchange controls. The common characteristic of these regions or countries is that their domestic economies are highly developed, social welfare systems are comprehensive, and the standard of living for residents is high. Therefore, the public generally lacks the motivation to immigrate to other countries.

In summary, China's current implementation of foreign exchange controls is based on a comprehensive consideration of the domestic and international economic environment, aimed at safeguarding national economic security and promoting the stable and healthy development of the economy.

In the future, as the country's comprehensive strength continues to grow and the quality of life for residents continues to improve, we may gradually explore more flexible foreign exchange management systems. However, before that, maintaining a moderate level of foreign exchange control remains necessary.

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