a hot debate: where should China's foreign reserve go

Editorial: It is well known that China has accumulated the biggest foreign reserve in the past couple of years. As is noted in academics, this big number of foreign reserve is a double edge sword. On the one hand, it represents the financial power of the state. So the government can resist malicious speculation on RMB from some sharks among foreign investors. And also domestic companies can import advanced equipments and technology patents by buying foreign exchange from SAFE(State Administration of Foreign Exchange) within specific limits. On the other hand, because foreign reserve exists in form of foreign government bonds and securities, there must be some kind of opportunistic cost and possibility of increasing the pressure of inflation.

When we can not rely on imports of the US and EU countries, what we can do with our foreign reserve to revive our economy? A hot debate is happening among some Chinese economists. I'd like to brief this debate(一场关于外汇储备用法的激辩).

On the night of Feb. 8, 2009, a hot debate is happening in the north of Ha'erbing. One side is Zhang Weiying, an economists and professor working in Peking University, the other side is Gao Xiqing, the CEO of China Investment Corporation. The focus is whether the foreign reserve should be redistributed to Chinese citizens to expand domestic demands.

Mr. Zhang made an adamant proposal that the big and idle foreign reserve can be partly redistributed to Chinese citizens to increase their purchasing power. And he thought it is helpful for every Chinese citizen to be the holder of the US bonds. Zhang's proposal was strongly refuted by Mr. Gao, who thought that once this accumulated reserve are redistributed to Chinese citizens, the government can't execute central management of foreign exchange, which is considered necessary to resist currency speculation. Mr. Gao said, "the Americans must oppose this proposal. because holding of the US government bonds means support of its credit. If we sell these bonds, the credit of bonds will drop dramatically. So is the expected profit of these bonds. And finally all of the foreign assets we are holding will become paper." Another reason he opposed the proposal is that he thought the citizens would rather deposit received money than consume. Let stimulating economy alone.

Mr. Zhang also defended his proposal. He said only a part of foreign reserve will be used for redistribution so that the national financial security will not be threatened.

Although the defense of Mr. Zhang seems unassailable, the proposal is a bit radical. The doubt of Mr. Gao about what the citizens will do with the money is reasonable. At present, most people don't have protection of social security. Education of children, disease, taking care of old parents are all big concerns for them. If these top concerns would not be relieved, consumption would not come as expected. So my opinion is that part of the reserve can be used in extending social safety net to all of the country so that people can consume without concern.