BEIJING — What to do with $3 trillion?
Bail out the euro so Europeans can keep buying stuff? Lock up mineral rights around the world? Spend it on imports? Sock it away under a mattress — or in U.S. Treasury notes — and let the pile keep growing?
China’s economy is the world’s second biggest, with a $5.8 trillion gross domestic product that eclipsed Japan in 2010. Will China pass the United States? When?
China’s foreign reserve holdings topped $3 trillion in March.
In what amounted to an acknowledgment that some of Beijing’s core economic policies are causing trouble, Chinese central bank governor Zhou Xiaochuan said this week that the country was, in effect, suffering from too much money. China’s foreign reserve holdings topped $3 trillion in March after increasing 25 percent in the past year alone, a pace Zhou said was feeding inflation and becoming difficult to manage.
“Foreign-exchange reserves have exceeded the reasonable level that our country actually needs,” Zhou said, and the continued buildup adds to the risk of inflation and makes it difficult for the country to manage its monetary policy.
The reserve figure is one of the central barometers of China’s economic relations with the rest of the world — the excess of money flowing into the country for imports and investments. Despite years of talk about the need for more balance, reserves have gone in one direction: up.
According to media accounts, Zhou stopped short of any recommended remedy. But the continued accumulation of reserves is closely linked with the country’s practice of keeping its exchange rate low and relatively stable against the dollar. Zhou’s comments reflect an intensifying dilemma over the trade-offs involved — particularly the risk of inflation and the rising interest rates and other measures that the People’s Bank of China is imposing to try to keep prices under control.
“China has reached a monetary policy stalemate,” in which traditional banking measures have not curbed inflation but authorities are unwilling to let the currency appreciate as another way to address the problem, Glenn B. Maguire, chief Asia economist with the financial services firm Societe Generale, wrote in an analysis Tuesday.
Zhou is considered a reformer on currency and other financial policies, but his is a minority voice. China’s central bank is not independent but answers to a ruling State Council that juggles the sometimes conflicting priorities of the country’s exporters, state-owned companies, local governments and other factions. Zhou is not a council member.
With China facing a pressing and politically sensitive rise in prices, there is debate about the forces involved: whether the country is being flooded by the dollars produced in Washington by the Federal Reserve to stimulate the U.S. economy or creating problems for itself.
The currency policy boosts the fortunes of export companies by keeping prices lower than they otherwise would be. But it also helps maintain a large trade and investment surplus, plus a flow of money being bet that at some point the yuan will rise in value — all components in the growth of China’s reserves. Some here argue that the large stockpile makes little sense in a country with pressing development needs.
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