Topic: Foreign reserves (Read 368 times)

Thanks for your valued comments. China is a fascinating  case of study for the students of Economics and political science. They wonder how could China became a global factory, achieved a remarkable progress with highest GDP growth rate,  and has largest foreign exchange reserves which no other country can match, almost everybody is employed and population living below poverty level is almost zero. China has achieved all this with one party rule and no freedom of speech for citizens. Figuring out , how China did all this in a particular political and economic set up is a big question.

A foreign reserve depends on the country's trade partner. If a country is just importing and Exporting with EU countries then that country might want to hold their reserve currencies in EURO because their exports and imports are mostly with them. In this case that country doesn't need to hold any USD if they don't have a trading relationship with them. Most countries want to use USD for international trade because most of them directly or indirectly trade with USA or their trading partner country.

First off - thanks for the assessment

Secondly - China... how can I explain it in a simpler way....It is probably more accurate to say that China wants to create a "world currency of the second world under the guise of the first world". Let me clarify what I mean.  In order for a currency to become a "world currency", it is necessary not only to desire it, but also to create a lot of conditions. From political and military potential, to influence on the world economy, leadership in technology, conditions, ..... and a dozen other indicators. China now has only a little - a lot of population, a lot of problems, ties with dubious regimes, building a totalitarian regime.... and that's it! Against the background of US advantages - it looks, to put it mildly, "very small".
But China found a group of countries (and hesitant), where logic and reason were replaced by populism and propaganda, and where China was able to slip them the yuan on the wave of absolutely fake hysteria "dedollarization" ! No one else needs the yuan ! From the word ABSOLUTELY NOT NEEDED ! But the export of economic problems through the yuan - for China is an option to solve the problems of domestic economic problems, at the expense of the economies of these victim countries, and officially "friends of China ...

Thirdly - yes, China is the largest holder of US government bonds, and is now increasing their volume again, which is easy to check !

It's actually the exact opposite, if Central Bank intervenes to increase foreign reserves, they will buy with local currency, thus increasing the local money supply, so the value of the local currency decreases, more money gets printed, and inflation follows.

The local currency is now worth less compared to foreign reference currencies...

Yes, it is. Here there is complete interference and complete possession, where you feel that you do not own anything, but everything is the property of the government. I am from Syria. I am sure you have heard of it. This country suffers from civil wars, internal conflicts and divisions, and the government there imposes very strict laws on all citizens regarding foreign exchange.

The banking system here is completely under the control of the government and we can acquire foreign currency at any time under the pretext of the state treasury’s need (of course they compensate those affected with worthless local currency).

But as far as I know, all countries that have comprehensive authoritarian regimes have the same principle. They may not declare this as official state laws, but this actually happens on the ground.

Honestly, it’s not about peeps but it’s about mega businesses that are associated with import and export. Various countries motivate their industries to do large exports so that they will be paid in USD and national foreign reserves will get increased sharply. For this many countries will also provide octrooi service charges as rakeback to the exporter. Meaning they are regarded through tax benefits in the hope that they will increase their export activity more and more.

The general public hardly contributes to foreign reserves since they are either shoppers or small merchants who won’t be working on mega levels.

Only way to increase it, increase the manufacturing and increase the export activity.

Your perspective is valid and insightful regarding the challenges China faces in making the Yuan a global currency. These hurdles include stability of financial markets and acceptability of Yuan as a viable global currency. The dominance of US dollar in international trade has deep historical roots, making it challenging for any currency to disrupt established practices and perceptions. While China has succeeded to some extent to promote Yuan in international agreements, there is still a need for concerted efforts through bilateral trade with key trading partners, to further advance its global standing.

In the context of the topic of opening post, it is worth mentioning here that China holds the largest foreign exchange reserves (3.1 trillion US dollars approximately), yet Yuan faces challenges in maintaining stability against the US dollar.

I've just heard of a state policy like that which I think is more than just "regulated", it's full intervention. In which country do you live?
In fact, there is no such strange policy in poor countries experiencing severe crises.

In general, it is a rule of thumb that if the bank offers foreign currencies to their citizens then it translates to a decrease in the international reserves, because it is supposed to be money the nation has already given out their power to land on private hands. An exception would be if the country is selling those foreign currencies because they have managed to increase their export rates and are able to offer such benefits to the population without having to sell part of their international reserves.
It would be an ideal scenario if people had enough trust in their local currency and did not have to be after the purchase of strong foreign banknotes in order to protect their savings. There are good examples of countries which have been economically responsible and avoided to fall into inflation.

Foreign exchange reserves are the foreign currency stored in a country's central bank, which comes from exports, remittances, remittances, foreign loans and other income, and which can be used for travel, spending in various sectors, and various other expenses. This currency is held for foreign trade and other past contracts and can help improve the status of a country's economy. Foreign exchange reserves help to stabilize the value of more countries' currencies and increase the currency's dependence on global markets. If a large part of the population uses foreign currency, it can affect the economy of the country. Also, it can be a cause of deterioration of the country's capital. This effect does not affect the economic readiness of the country in general, but it can cause some changes in relative terms.

Many countries which generate a trade surplus every year choose to store a portion of their excess income in foreign currencies, such as the US Dollars or Euros. They do this as protection against currency depreciation: Holding foreign reserves can help protect a country's economy from the negative effects of currency depreciation. When their currency loses value, the imports become more expensive, and the export become less competitive. This may lead to inflation, lower economic growth, and reduced living standards for citizens.

Foreign reserves provide a source of liquidity for central bank of a country which makes it enable to intervene in the foreign exchange market to stabilize the value of the currency. This can be crucial during times of economic or financial crisis when investors may be selling off their currency. Holding foreign reserves can make it easier for them to conduct international trade. Businesses that engage in international commerce often need payment in foreign currencies. Having a stockpile of foreign reserves can help ensure that these businesses have access to the necessary funds. A large foreign exchange reserve position can be seen as a sign of economic strength and stability. This can attract foreign investment and boost a country's creditworthiness.

What are the foreign reserves that you mean? Because you are mostly talking about the US dollar, and just like any currency, there is inflation and the printing of more money, which appears in the form of a weakening of the purchasing power of the dollar against goods and services. If we say that I can buy For $100 to buy the same product at the present time, and therefore, citizens holding the dollar will not affect the price of the dollar given the total supply of the dollar available compared to the demand.

The thing that may affect if China and Japan sell US Treasury bonds.

This is where we are being cheated, it should have increase over time when the value of the fiat currency increases over a local currency of a particular country, but that's not the case, your financial asset remain still all because they are not cryptocurrency, if it were to be btc, it value will increases as the value placed on him increases, maybe all these were part of what lead to the development of a decentralized cryptocurrency

They are linked. When exchange rate of a currency drops, it leads to inflation. Of course it is not the only thing that affects inflation but it has a significant effect.

When you are reporting exchange rate for a whole year you can't just take a single point in a fluctuating market (eg. the peak in case of 2020) and run your conclusion based on that. In this case pound exchange rate started 2020 at $0.76 and only went to $0.86 "momentarily" before coming down to $0.76 again.
So you should at least use the average of the year which was around $0.75.
Same with other years, 2021 average looks around $0.72 which makes the drop about 4% not 19%.

You are again focusing too much on peaks. Fuel prices didn't come down from £1.90. They went up from £1.02 to £1.52 in this time frame.
And fuel is just one thing to consider when talking about product prices. There is interest rate, recession, inflation, supply chain disruptions, import troubles and expenses, and a lot more.

If the citizens are buying a holding foreign currency and holding them in their foreign currency accounts, don't contribute to the country's foreign exchange reserves. as these funds privately owned by the individuals. Foreign change reserves of the country  generally represents holdings of central bank of the country. Moreover, such privately holdings are not utilized for payment of imported goods. In some counties where national currencies are not stable and consistently losing their value against US dollar, the trend of making saving in foreign currencies is growing. However, this trend can lead to further depreciation in the value of local currency against the US dollar, Euro and British pound.

I apologize, but you are mistaken. You are confusing free currency in the country with gold and currency reserves of the State.
The money in the hands of citizens is not the gold and currency reserves of the state, it is the currency that is bought in the banking system. And accordingly, they do not affect these reserves, because the state can not manage them and use them if necessary. There are, of course, variants - when the state is totalitarian and can forcibly block and take away citizens' funds, for example, by forcibly exchanging, for example, dollars for local currency. But even in this situation it will affect only those foreign currency savings of citizens that are inside the banking system and can be technically "expropriated"

If the citizens are holding foreign currency in their various accounts that means the diaspora remittances of that country has increased, so statistically the government can easily declare that the money and foreign reserve has increase including the ones in the government coffers.

If citizens of a country purchase foreign currencies and hold them in their bank accounts without using them to make purchases from other countries, the foreign reserves do not actually decrease.

Foreign reserves include both the currencies held by the government and those held by the citizens.
Citizens who hold foreign currencies in their bank accounts contribute to the overall foreign reserves of the country.

However, if citizens start using these foreign currencies to buy goods and services abroad, then there will be a decrease in the foreign reserves.

The USA prints a lot of money, but this country has the lowest inflation compared to Europe.
According to economists, most of the dollars do not leave banks and stock markets, increasing the value of many companies, and a small part of this money ends up in cryptocurrency markets. According to other versions, the dollar is stable because the United States is far from territories with military conflicts.

People buying foreign currencies and holding them in their domestic accounts don't reduce a country's foreign reserves. The central bank manages these reserves of assets in different currencies for international trading and currency exchange rates. The reserves are primarily about paying for imports and stabilizing the currency.

However, your circumstance has indirect implications. Hoarding foreign currency might cause local currency shortages. Scarcity can raise the exchange rate, making foreign currency more expensive. This might harm the nation's economy if it happens widely. The central bank may have to use its reserves to stabilize the currency market. Holding foreign currency in domestic accounts doesn't deplete reserves, but it can affect economic conditions that may cause the central bank to use its reserves.