It’s no longer in China’s favor to accumulate foreign exchange reserves. With the country’s announcement of a policy shift on this issue, what does this mean for the global and regional economy, and for us?
While the tapering of quantitative easing (QE) is the dominant economic issue today, the announcement made by the People’s Bank of China last November that China no longer benefits from further increases to its foreign currency holdings is likely to have significant implications.
China’s massive US$3.66tril in foreign exchange reserves as of last September coincides with its ascendancy as the world’s manufacturing powerhouse. China’s dominance had set the tone for other export-based economies in Asia, encouraging many countries to manage their exchange rates by accumulating foreign exchange reserves to remain competitive against Chinese exports. Indeed, this savings glut has turned Asia into the world’s net debtor, and the US the largest creditor1. Therefore, a Chinese policy shift on this issue will have ripple effects throughout the world in years to come. Might this herald the start of a strong Yuan policy?
