China should restructure overseas assets and liabilities, while maintaining capital controls: economist

Photo taken on Sept. 18, 2019 shows US dollar banknotes in Washington DC, United States. File photo: Xinhua

China should restructure its overseas assets and liabilities, aiming to improve net returns from overseas investments and reduce the share of foreign exchange reserves tied to the country’s overseas assets, said a leading economist at a key forum on Saturday, drawing attention to the safety of China’s huge US-dollar-denominated assets.

Yu Yongding, a fellow of the Chinese Academy of Social Sciences, made the remarks via video at the Tsinghua PBCSF Chief Economist Forum held in Beijing, which focused on the country’s economic and political outlook. amid geopolitical uncertainty and economic pressure this year.

Yu stressed the need to maintain capital controls to curb speculative capital inflows and capital flight.

Under the current dollar-based international monetary system, there remains an inherent contradiction that the United States can only provide the world with dollar liquidity by maintaining a current account deficit. However, the larger the trade deficit maintained by the United States, the greater the likelihood that the dollar will depreciate, Yu said.

Regarding the decision of the United States to freeze $300 billion of Russian assets following the Russian-Ukrainian conflict, Yu said that this decision had seriously damaged the solvency of the United States. The status of the dollar as an international reserve currency has also been undermined.

According to the economist, the United States had $15 trillion in net external debt at the end of 2021. The fact that the dollar was able to remain stable despite the increase in the ratio of American external debt to GDP is due to the strong demand for the dollar as a reserve currency from the rest of the world, particularly from China.

Among them, five countries – Japan, China, the UK, Ireland and Luxembourg – bought $3.6 trillion in US Treasuries.

For a long time, China has accumulated $3.3 trillion in dollar reserves through current account receipts and capital account surplus.

Yu noted that the figure exceeds the foreign exchange reserve adequacy requirement. A large share of foreign exchange reserves is “borrowed” from the capital account surplus, rather than from the trade surplus.

Therefore, “China’s overseas assets and liabilities need to be restructured to enhance security,” Yu said, suggesting authorities reduce holdings of US Treasuries and increase holdings of other forms of debt. assets, increase investment in countries producing strategic resources and strictly protect foreign investment. investors in China.

In addition, the government should consider expansionary fiscal and monetary policies to boost domestic demand and stimulate imports. The country could also increase its imports of raw materials and strategic goods, in addition to a reduction in purchases of US Treasuries and an increase in imports of US goods, the economist suggested.

Maintaining a trade deficit at a specific time to deplete excess foreign exchange reserves could be among the policy adjustment options available, he noted.

world times

James V. Hayes