Making sense of China’s excessive foreign reserves

Yi Wen

No 2011-006, Working Papers from Federal Reserve Bank of St. Louis

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.

Keywords: International trade; Balance of trade - China; International finance (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-cis, nep-dge, nep-ifn, nep-mon and nep-tra
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Citations: View citations in EconPapers (7)

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