China should be cautious

Author: | Published: 1 Dec 2007

In recent years a sea change has occurred in global economic conditions. There has been an acceleration of the accumulation of foreign reserves in countries that export oil and other commodities, as well as in fast growing and export-intensive countries as China. Uninterrupted growth in China has increased global demand for energy and raw materials. At the same time, there have been large-scale trade and fiscal imbalances in the US, and the price of oil has quadrupled. Chinese currency policies have also influenced developments.

Until recently, central banks or finance ministries held most foreign reserves, both in China and elsewhere, in highly liquid, relatively low-yielding and low-risk securities issued by the US and European treasuries. The level of such reserves has accumulated beyond the levels agreed to stabilise currency or trade-balance financing. A number of countries have reallocated the surplus reserves to create sovereign wealth funds (SWFs) – the term...