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Making sense of China’s excessive foreign reserves

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  • Yi Wen

Abstract

Large uninsured risk, severe borrowing constraints, and rapid income growth can create excessively high household saving rates and large current account surpluses for emerging economies. Therefore, the massive foreign-reserve buildups by China are not necessarily the intended outcome of any government policies or an undervalued home currency, but instead a natural consequence of the country?s rapid economic growth in conjunction with an inefficient financial system (or lack of timely financial reform). A tractable growth model of precautionary saving is provided to quantitatively explain China?s extraordinary path of trade surplus and foreign-reserve accumulation in recent decades. Ironically, the analysis suggests that without a well-developed domestic financial market, the value of the renminbi (RMB) may significantly depreciate, instead of appreciate, once the Chinese government abandons the linked exchange rate and the massive amount of precautionary savings of Chinese households are unleashed toward international financial markets to search for better returns.

Suggested Citation

  • Yi Wen, 2011. "Making sense of China’s excessive foreign reserves," Working Papers 2011-006, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2011-006
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    File URL: http://research.stlouisfed.org/wp/2011/2011-006.pdf
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    References listed on IDEAS

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    9. Enrique G. Mendoza & Vincenzo Quadrini & José-Víctor Ríos-Rull, 2009. "Financial Integration, Financial Development, and Global Imbalances," Journal of Political Economy, University of Chicago Press, vol. 117(3), pages 371-416, June.
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    Cited by:

    1. Taha Choukhmane & Nicolas Coeurdacier & Keyu Jin, 2023. "The One-Child Policy and Household Saving," Journal of the European Economic Association, European Economic Association, vol. 21(3), pages 987-1032.
    2. Seghezza, Elena & Morelli, Pierluigi & Pittaluga, Giovanni B., 2017. "Reserve accumulation and exchange rate policy in China: The authoritarian elite's aim of political survival," European Journal of Political Economy, Elsevier, vol. 47(C), pages 163-174.
    3. repec:spo:wpmain:info:hdl:2441/5e8993t1rs83t9os9ctp26bhfv is not listed on IDEAS
    4. Dai, Meixing, 2011. "Motivations and strategies for a real revaluation of the Yuan," MPRA Paper 30440, University Library of Munich, Germany.
    5. Philippe Bacchetta & Kenza Benhima & Yannick Kalantzis, 2013. "Capital Controls with International Reserve Accumulation: Can This Be Optimal?," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 229-262, July.
    6. repec:hal:spmain:info:hdl:2441/5e8993t1rs83t9os9ctp26bhfv is not listed on IDEAS
    7. Lee, Sang Seok & Luk, Paul, 2018. "The Asian Financial Crisis and international reserve accumulation: A robust control approach," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 284-309.

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    Keywords

    International trade; Balance of trade - China; International finance;
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