Foreign exchange accounts
Fundsoutst forexrebatebest forexbrokerrebateprogramgfor autorebateforex forex broker rebate program Introduction to foreign exchange accounts Foreign exchange accounts (Fundsoutstandingforforeignexchange) refers to the banks acquisition of foreign exchange assets and the corresponding investment of domestic currency banks to buy foreign exchange to form the local currency investment, the foreign exchange assets purchased As the bank settlement system consists of the bank over-the-counter settlement market and the interbank foreign exchange market, the demand and supply of foreign exchange in the two markets are regulated rigidly, and "foreign exchange standing" also has two meanings: one is the central banks acquisition of foreign exchange in the interbank foreign exchange market to form the RMB investment; the other is the unified consideration of the bank over-the-counter market and the interbank foreign exchange market. The first type of foreign exchange accounts belongs to the central banks purchase of foreign exchange, which is reflected in the "balance sheet of the central bank", and the second type of foreign exchange accounts belongs to the purchase of foreign exchange by the entire banking system (including the central bank and commercial banks), which is reflected in the "balance sheet of all financial institutions". Under the strict bank settlement and sale system, the central bank acquires foreign exchange assets to form the foreign exchange reserves held by the central bank, while the whole banking system acquires foreign exchange assets to form the foreign exchange reserves of the whole society. Foreign exchange reserves The two meanings of foreign exchange reserves have different impacts on the domestic RMB currency and funds as follows: 1. After the reform of foreign exchange system in 1994, the balance of payments continued to be "double surplus" and the supply in the foreign exchange market exceeded the demand, so the central bank passively intervened in the market to maintain the exchange rate stability, which led to a surge in foreign exchange reserves, an increase in the central banks foreign exchange reserves and a passive expansion of the cashback forex supply. In order to keep the growth of the money supply within the predetermined range, the central bank had to issue central bank notes and recovery, compression and other credit lending and rediscounting balance in the case of higher discount rate has shrunk close to zero central bank hedging operations, one is the result of the change in the structure of money placement, the proportion of foreign exchange accounts rose sharply while the proportion of reloans and other ways of money placement declining foreign exchange accounts become the main channel for the placement of base money. Second, the central banks initiative to regulate the money supply has decreased, and the effectiveness of the monetary policy control mechanism is naturally reduced. 2. When foreign exchange reserves continue to grow, the base money needed for economic operation can be guaranteed to be put in, while when foreign exchange reserves grow slowly, because the central bank has formed a dependence on the foreign exchange account method of base money input, monetary policy often cannot increase other methods of base money input in a timely manner, which will inevitably affect the artistry and ability of the central bank to use monetary policy. For example, in 1994-1995, the domestic inflationary pressure was high, while the contribution of foreign exchange reserves to the growth of base money was 66.5% and 63.5% respectively, which aggravated the inflationary pressure and led to a significant reduction in the effect of the implementation of tight monetary policy. Obviously, the central bank relies too much on foreign exchange reserves to put in base money, so that the initiative of the central bank to regulate the money supply decreases and the difficulty of achieving monetary policy objectives increases. 3. In the macro environment with a low degree of external openness, the central banks base money injection to expansion has to go through a long time lag from the central banks discovery of problems and policy formulation (internal time lag) to a series of credit activities of commercial banks (intermediate time lag) and the transformation process of deposit and loan from the banking system to the enterprise system (external time lag). The foreign exchange accounts have become an important channel for base money injection, and the foreign exchange accounts can rapidly convert base money into enterprise and resident deposits through the bank settlement system, which has led to the acceleration of the expansion of money supply and the shortening of the time lag of monetary policy. 4. The foreign exchange accounts have become the main channel for base money injection, while refinancing and rediscounting are mainly for the recovery of funds, resulting in a structural imbalance of domestic money injection, which makes the adjustment of monetary policy difficult. In terms of industrial structure, export-oriented enterprises, sectors and industries can get RMB funds after settlement and sale of foreign exchange, which can be transformed into relatively abundant bank deposit funds; while inward-oriented enterprises, sectors and industries cannot get sufficient fund support because the central bank recovers reloans and discounts at a higher rate; in terms of regional structure, coastal and developed regions with a higher degree of openness to the outside world have a relatively abundant supply of funds. Developed regions with a higher degree of openness to the outside world have a relatively sufficient supply of funds: while mainland regions with a lower degree of openness have a relatively short supply of funds (especially in the western region). Due to the uneven distribution of exports and foreign capital inflows among different sectors and regions, coupled with the different profitability of different sectors and regions, it is difficult to ensure that the funds invested through foreign exchange accounts flow to reasonable regions and industries in need of support, resulting in foreign trade enterprises This structural change will increase the difficulty of monetary policy and industrial policy adjustment and affect its implementation effect. The specific relationship chain of foreign exchange accounts is: balance of payments surplus, increase in net foreign assets, increase in foreign exchange reserves, increase in foreign exchange accounts, increase in base money, increase in money supply. It should be noted that the increase of money supply in this process is passive. Chinas foreign exchange reserves have gradually increased and become an issue of concern mainly through the following processes. First of all, the problem of foreign exchange accounts is closely related to the RMB exchange rate formation mechanism. In 1994, when the single exchange rate system was implemented in line with the market, the RMB exchange rate was lowered by nearly 50% at one time. The devaluation of the RMB promoted the increase of exports after a short J-curve effect, and exports increased by 31.9% in that year． The exchange rate reduction made foreign exchange more valuable, and the rapid development of Chinas economy and the huge potential surplus demand attracted a large influx of foreign capital, making the supply of foreign exchange greater than the demand, thus laying the groundwork for the problem of foreign exchange accounts. Second, in 1994, the exchange rate was consolidated and a single, managed floating exchange rate system based on market supply and demand was implemented for the RMB. However, after the East Asian financial crisis, for the purpose of avoiding foreign exchange risks and maintaining the smooth operation of the financial system, Chinas monetary authorities actually pegged the RMB to the US dollar, implementing a de facto pegged exchange rate system. 1999 the IMF also officially included the RMB exchange rate in the pegged exchange rate category. In order to maintain the RMB pegged exchange rate system, the Peoples Bank of China must purchase foreign currency in the foreign exchange market, while the compulsory settlement and sale of foreign exchange system makes the central bank can only be in a passive position in the foreign exchange market, had to purchase excess foreign currency, foreign exchange accounts problem then arose. Again, since 2000, Chinas foreign exchange reserves have grown rapidly, and the problem of foreign exchange accounts has further expanded. One is that with the good economic growth momentum of China, foreign investment gradually increased, the investment amount in 2003 and 2004 were: 53.5 billion U.S. dollars, 61 billion U.S. dollars. Secondly, with the strengthening of Chinas economic strength, the structure of export products is gradually optimized, and the surplus of foreign trade continues to increase. Finally, since 2003, foreign groups led by the United States and the United States have been exerting pressure on the appreciation of the RMB, causing a large influx of foreign speculative funds to profit from the appreciation of the RMB. These factors led to the rapid growth of foreign exchange reserves． By the end of June 2005, Chinas foreign exchange reserves had reached 711 billion U.S. dollars. At the same time, the foreign exchange accounts have increased significantly, and the problem of foreign exchange accounts has arisen. The impact of foreign exchange reserves on Chinas economy 1, the impact of the increase in foreign exchange reserves on the money supply The increase in foreign exchange reserves makes the Peoples Bank of China must purchase U.S. dollars and put the yuan. In this process, the central banks balance sheet shows the increase in foreign exchange reserves, the result is the base currency. This makes the foreign exchange account one of the main channels for putting base money in China, and the central bank has no direct control over the size of the foreign exchange account. After it is put into circulation, it will multiply the money supply in China under the role of money multiplier. The large scale of unplanned currency input will inevitably affect the implementation of Chinas monetary policy and the achievement of the goal of currency stability. Table 1 Relationship between foreign exchange accounts and base money Year foreign exchange accounts (a) base goods (b) (a)/(b)% annual increase in foreign exchange accounts (c) annual increase in base goods (d) (c)/(d)% 19956774.52O759.832.6///19969578.726888.535.62804.26128.745.8199713467.2306. 8199713467. 230632. 844. 03888. 53744. 3103. 9199813728. 331335. 343. 8261. 1702. 537. 21999147923362044. 01064. 12284. 746. 62O0O14291. 136491. 439 The 2-501.32871.4-17.5200117856.439851.744.83565.33360.31O6.1200223223.345138.251.45366.95286.5101.5200334846.952841.465.9l1623.67703 The 2150.9 Source: China Statistical Database. Table 1 clearly shows the relationship between Chinas foreign exchange accounts and base money. In 1995, the ratio of foreign exchange accounts to base money was 32.6 percent, and in the following years, the ratio was repeated, but the overall trend was up. 2002, the ratio exceeded 50 percent. In 2003, it reached 65.9 percent. The increase in foreign exchange accounts as a percentage of the increase in base money fluctuates greatly, from 45.8 percent in 1996 to 103.9 percent, and then drops sharply. In 2000, the ratio was negative, indicating a negative growth of foreign exchange accounts, and the growth of domestic credit compensated for the negative growth of foreign exchange accounts. The data for the next three years (all above 100%) show that the increase in base money was entirely contributed by the increase in foreign exchange, and the increase in foreign exchange also compensated for the negative growth in domestic credit. Since the reform of the foreign exchange system in 1994, the structure of base money investment by the central bank in China has undergone fundamental changes, and foreign exchange accounts have become the main channel of base money investment, especially after entering the 21st century. Under the role of the money multiplier, the money supply will increase exponentially, which brings huge pressure to the central banks monetary control and is very likely to cause inflation. 2. The impact of the increase of foreign exchange on economic growth. According to the theory of monetary school, when the economy has not reached full equilibrium, the increase of money supply will promote the economic growth. In China, there is a strong correlation between the growth rate of the economy and the growth rate of RMB loans from financial institutions. A study by Xia Bin (2003) also shows that the growth of bank loans has a strong explanatory power for economic growth during the period 1997-2002. The table below also shows that when loans from financial institutions increase, GDP growth is also rapid; when loans from financial institutions decrease, GDP growth decelerates. The growth rate of RMB loans to financial institutions is highly correlated with the growth rate of GDP, with a positive correlation of R=0.917 (see Table 2). If the proportion of financial institutions funds used in foreign exchange accounts and securities investment increases, the proportion of funds used in loans will decrease accordingly, which will affect the growth rate of bank loans. Therefore, a large amount of foreign exchange will reduce bank loans to enterprises, which will inhibit the production and investment of enterprises and lead to the decline of economic growth rate. Table 2 RMB loan growth rate of financial institutions and GDP growth rate Year-on-year growth of loan balance GDP growth rate 199815.5%7.8%199912.5%7.1%200013.4%8.0%2001l1.6%7.5%200215.1%8.0%200321.1%9.1% Correlation coefficient R=0.91 Source: Peoples Bank of China. Peoples Bank of China． The increase in the size of foreign exchange accounts will affect the ongoing economic restructuring in China. At present, the countrys sources of funds for structural adjustment are mainly fiscal funds and credit funds. Due to the squeeze of foreign exchange accounts, Chinas fiscal share of GNP is getting lower and lower, and the share of central government finance is also decreasing. Due to the national austerity policy, the credit fund is not playing its proper role in the structural adjustment (especially the regional economic restructuring), which is weak. The outstanding problem in Chinas national economy in recent years is that the structural contradiction is becoming more and more prominent while the total contradiction is easing, and the phenomenon of duplication of construction is serious. At the same time, the financial expenditure on education, medical care and health is seriously insufficient, which has affected the improvement of the quality of economic growth and weakened the sustainable strength of economic development, and must be changed with great efforts. 3、The impact of the increase of foreign exchange accounts on the industrial structure. The increase of foreign exchange accounts has a great impact on the industrial structure of China. Due to the existence of the foreign exchange settlement system, with the gradual increase of foreign exchange accounts make it easier for Chinas export-oriented enterprises to obtain ample RMB funds through foreign exchange settlement, so that the development conditions of these enterprises are relatively more relaxed, which has a greater promotion effect on their production mainly in the following aspects. First of all, technical personnel and labor force are further transferred to outward-oriented enterprises. This is because the inward-oriented enterprises, due to the lack of funds, the low start-up rate, the demand for labor is decreasing, and a large number of technical personnel are laid off, while the outward-oriented enterprises, due to the relative abundance of funds, still have the potential to expand production, which is bound to promote the flow of technical personnel and labor to outward-oriented enterprises. Secondly, a large amount of raw materials are transferred to the foreign trade sector. The export-oriented enterprises have more abundant capital and can be in a dominant position in the production material market, which creates a good financial environment for them to purchase raw materials and machinery and equipment at low prices in time. The lower cost of wood and strengthen the competitiveness of export-oriented enterprises to create higher profits. This forms a virtuous circle, which makes export-oriented enterprises get a longer development. Chinas export-oriented sector is mainly foreign-invested enterprises engaged in processing trade. The development of processing trade, on the one hand, has caused Chinas trade dependence to be too high, resulting in the lack of sustainable growth potential of Chinas foreign exports; on the other hand, it has impacted the development of related domestic raw material industries, which is not conducive to the upgrading of domestic industrial structure. In the processing trade, foreign-invested enterprises fully grasp the market and sales channels, tight control of key technologies, the technology and product development capabilities remain mostly outside the country, while the Chinese side only involved in simple processing and assembly links. In addition, some foreign-invested enterprises even transfer industries with low technology level and serious environmental pollution to China for production, bringing disastrous consequences to Chinas environment. The pattern of processing trade with foreign-invested enterprises rather than state-owned enterprises as the main business, resulting in Chinas original large industrial base and technology base can not play a full role, which also delayed the upgrading of the entire processing trade and the improvement of the degree of domestic support, thus delaying the processing trade on the industrial structure of the driving effect.