During what is now called " war of currencies, foreign exchange reserves play a central role. China, Japan and Brazil accumulated hundreds of billions of dollar to depreciate the value of their currency. Little element of economic life are as yet poorly understood. For the vast majority of economic analysts, "a country builds its foreign reserves through its trade surpluses." This sentence long intrigued me. How a state governing a market economy have the power to reinvest the profits of his business enterprises? Imagine that you are the leader of a Japanese company exporting to the United States. Do you think you would agree that the government move you take the dollars you have accumulated in order to reinvest in good U.S. Treasury? Such a mechanism would make sense only in a communist state in the image of the USSR or Cuba. In a market economy, it's just not possible.
In fact, as I could realize it by digging the subject there is no mechanical link between the lower trade surplus and foreign reserves. A large deficit countries may very well hold important. It is just that countries with the means and interest to have strong foreign exchange reserves are inherently countries with strong trade surplus. Indeed, trade surpluses tend to cause an appreciation of the domestic currency makes domestic exports less attractive. To avoid this assessment and preserve their industry, governments resort to excess reserves. Foreign exchange reserves are the result of political . Without it, they would not exist. We will make an inventory of different types of financing of these enigmatic reserve.
The case of Japan's foreign reserves by borrowing
According to a former finance minister of Japan: "Japan has 1 000 billion foreign exchange reserves, but they were funded by Debt unlike the Gulf countries, Singapore or Australia. " Yep! The easiest way to create foreign exchange reserves is still debt. The land of the Rising Sun has a debt of 20% of its GDP to finance its foreign exchange reserves. The mechanism is very simple. The government borrows yen in financial markets and investing that money in U.S. Treasury bonds denominated in dollars.
The case of Australia reserves through a budget surplus
The Australian government's budget was in surplus between 1996 and 2008. Part of this surplus was invested in foreign reserves. The mechanism is again could not be more simple. A surplus means that the Australian government revenue were higher expenses. The surplus denominated in Australian dollar was then invested in foreign currency. The Gulf countries are Norway or in cases similar.
The case of Brazil's reserves through money creation
With over $ 283 billion, Brazil is ranked 7 th world in terms of foreign reserve. As shown in the balance sheet of the Brazilian central bank, most of these foreign reserves has been funded by money created from scratch. The mechanism here is again very simple: the central bank created the Brazilian Real in any room and uses it to buy U.S. Treasury bonds denominated in dollars. This policy could have devastating inflationary effects which a large number of countries is possible without major clash in Brazil with a mandatory bank reserve ratio to around 40%. Thus the demand for money central banks are very strong, Brazil can run printing money quickly and use it to fund its reserves.
The case of China: a hybrid model
China with over 2600 billion in reserves, China alone accounts for nearly a quarter of global currency reserves. China uses three methods listed above to finance its foreign exchange reserves: money creation, debt and budget surplus. In reality the money creation is the main mode of financing the reserves in China. China has three primary advantages allowing it to emit large quantities of base money: rapid economic growth, a high reserve requirement ratio of about 16% and savings is very important crystallizing a strong demand for money by the Chinese people.
course there are strong linkages between macroeconomic trade surplus and foreign exchange reserves. Surpluses have a strong impact on savings and fiscal balance. However, this link has absolutely nothing automatic and many countries have regular trade deficits have significant foreign exchange reserves. For proof, France has foreign reserves of 142 billion dollars, ranking at 16 th world in terms reserves ...
Regarding the reserve requirement, a point which interests me particularly, it is easy to see how develop the reserve requirement ratio higher in countries like China and Brazil (16% and 43% against 2% within the euro area) give them an immense clout in the global economy.
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