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Why China Should Invest Its Foreign Exchange Reserves in the Major US Banks

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  • Qiangbing Chen

Abstract

The subprime mortgage crisis and the resultant inflationary monetary policy in the USA have left the Chinese economy subject to four risks in particular. First, China's exports to the USA might continue to decline. Second, in the medium term, the higher US inflation rate will lead to a weak dollar, which will negatively affect China's exports. Third, in the long term, when the US Federal Reserve decreases money supply to control inflation, the US economy might enter another recession, hurting China's exports further. Fourth, China's foreign exchange reserve assets might suffer heavy losses when the US inflation rate rises. Conventional foreign exchange investment strategies are insufficient for dealing with these four risks. Investment by China in the major US banks is suggested in the present paper. This strategy would mitigate if not eliminate all four risks. China could gain considerable financial returns on investments with only moderate risk.

Suggested Citation

  • Qiangbing Chen, 2009. "Why China Should Invest Its Foreign Exchange Reserves in the Major US Banks," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 17(4), pages 1-17, July.
    • Handle: RePEc:bla:chinae:v:17:y:2009:i:4:p:1-17
    DOI: 10.1111/j.1749-124X.2009.01155.x
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    References listed on IDEAS

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    1. Ming Zhang & Fan He, 2009. "China's Sovereign Wealth Fund: Weakness and Challenges," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 17(1), pages 101-116, January.
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    6. repec:bla:ausecr:v:40:y:2007:i:1:p:3-23 is not listed on IDEAS
    7. Jan Hatzius, 2008. "Beyond Leveraged Losses: The Balance Sheet Effects of the Home Price Downturn," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 195-227.
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    Cited by:

    1. Dai, Meixing, 2011. "Motivations and strategies for a real revaluation of the Yuan," MPRA Paper 30440, University Library of Munich, Germany.
    2. Meixing Dai, 2013. "In search of an optimal strategy for yuan’s real revaluation," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 11(1), pages 29-46, February.

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