Critical Issues to Stabilize Foreign Exchange Reserves for China under the Normal State of Economy

Abstract

This article aims to provide discussion on foreign exchange reserves loss in China taken place from mid-year of 2014 to early time of year 2017 by providing critical issues for Beijing administration to defend his reserves. The causes of foreign exchange reserves loss and rescue measures by Chinese financial administration such as defending exchange rate of RMB and capital control is discussed. This study evaluates effectiveness of current rescue measures conducted by financial administrators through observation on Chinese foreign exchange market responding in this specific period. Capital control has been proved as one efficient measure to control excessive financial outflows. However capital control policies have negative effect on efficiency and convenience for normal financial outflows. With analyzing structure of sources of financial outflows, this article concludes the illicit financial outflow is a critical factor to disturb stability of foreign exchange market. With multiple tricky channels to transfer huge amount of foreign currency outbound of China, the illicit financial outflow stay in a blind area for Chinese national financial administration. This article suggests that Beijing administration may require outbound financial outflows flow to pass through government controlled channels such as state enterprise banks. The medium of currency for financial outflows could apply digital currency also. These two measures are more effective for government to supervise sources and destinations of financial outflows and block illicit financial outflows rather than capital control. Meanwhile for a long term, the critical issue for Beijing to stabilize Chinese foreign currency reserves is how to expand scope of RMB settlement in the global commercial activities and reduce the dependence on the foreign exchange. To achieve these objectives, two methods are proposed by this article. One  is to increase weight of RMB settlement in international trade. The other method is to set up off-bank RMB settle center in Chinese mainland which could accelerate RMB recycle in the global market and enhance RMB usage rate in the global financial market