The author is grateful to the anonymous referee for insightful comments and suggestions. The help from Dr Yali Liu is also appreciated.
Why China Should Invest Its Foreign Exchange Reserves in the Major US Banks
Article first published online: 20 JUL 2009
© 2009 The Author Journal compilation © 2009 Institute of World Economics and Politics, Chinese Academy of Social Sciences
China & World Economy
Volume 17, Issue 4, pages 1–17, July-August 2009
How to Cite
Chen, Q. (2009), Why China Should Invest Its Foreign Exchange Reserves in the Major US Banks. China & World Economy, 17: 1–17. doi: 10.1111/j.1749-124X.2009.01155.x
- Issue published online: 20 JUL 2009
- Article first published online: 20 JUL 2009
- China's exports;
- foreign exchange reserves;
- subprime mortgage crisis;
- US bank crisis
The subprime mortgage crisis and the resultant inflationary monetary policy in the USA have left the Chinese economy subject to four risks in particular. First, China's exports to the USA might continue to decline. Second, in the medium term, the higher US inflation rate will lead to a weak dollar, which will negatively affect China's exports. Third, in the long term, when the US Federal Reserve decreases money supply to control inflation, the US economy might enter another recession, hurting China's exports further. Fourth, China's foreign exchange reserve assets might suffer heavy losses when the US inflation rate rises. Conventional foreign exchange investment strategies are insufficient for dealing with these four risks. Investment by China in the major US banks is suggested in the present paper. This strategy would mitigate if not eliminate all four risks. China could gain considerable financial returns on investments with only moderate risk.