Topic: Foreign reserves (Read 435 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.

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.

Yes, your words may be correct. I am not completely sure, but what I meant is that if there is a shortage in the foreign exchange reserve, the government will withdraw the reserve in the banks and reserve it for its benefit. They will compensate those affected instead in the local currency, so I assumed that personal investments are included in Foreign exchange reserves due to the government's ability to acquire them in emergency situations.

I don't know how the laws work in other countries, but at least this is the case in my country.

The Yuan cannot become the world's reserve currency (second, third or otherwise) for a simple reason - the Yuan is not stable and cannot provide the level of liquidity that the US has. Plus China is trying, so far without results (except for a couple of not the smartest countries) under the far-fetched ideology of "dedollarization", to transfer some of the nearest countries to the yuan, i.e. to yuanize their economies, making them dependent on the collapsing Chinese economy. More precisely, to make these countries donors of the Chinese economy to save it.

At the same time, China is very happy to sell its goods for DOLLAR. And buys their goods and services from the countries, economic appendages, for YUAN.  This is done for the purpose of saving China's economy by accumulating stable currencies (dollars/euros) and exporting inflation and problems from China via the Yuan, which is accumulated by "China's unfortunate friends"

If you as a citizen hold some other country's currency then it's just in your wallet. You are no different from a Forex trader who waits for the value to grow.

Foreign reserves are to be transacted from bank to bank or brokers in facilitating global transactions and investments. Usually in the form of USD since it is the global reserve currency and easier to transact and widely accepted. But today countries wanting to trade with China, their central banks are using yuan to facilitate transactions because their economy is bigger than their importers. Yuan could become the Foreign reserves of other countries if more countries consider it more than the USD.

Countries that make a surplus each year like to stockpile some of their excess income by storing additional funds in other currencies, this in turn can help support the value of their own currency because it's shown to have some reserves and the value is not completely based on thin air. However it is a tricky situation, because those currencies are controlled by another country that has the ability to print even more and devalue those holdings. It's a fine balance, because they don't want to devalue it too much, but by devaluing those currencies it is possible to make any money the government has borrowed from overseas worth less over time - so it makes a lot of sense to do this.

I think foreign reserve refers to the value of a country's worth in financial instrument like bonds apart from the currency. Maybe savings that a country have with another country like bonds, Treasury bills, foreign banknotes.

It is also in form of savings that a country have deposited officially in another country bank for savings, reserve or to be used but at the time it has not been used then it will be referred to as foreign reserve.

A country might execute a project or contract for another country and decide not to be paid and reserve the debt as reserve.

So it may be referred to the worth of money a country has outside it shores including financial instruments. It increases trust on the country or decreases it depending on the worth and financial strength.

If it's in a bank account then expect that the physical currency has already circulated back to the economy or has been exchanged already with the origin of the currency. I don't know about other foreign currency but US accounts for their currency being lost in an annual scale so they print out to offset or balance the circulation with consideration to the projected lost currency. I'm not familiar with how foreign reserve makes for an indicator of the positive or negative movement of the economy so I can't say much about it, maybe I'll learn something about that, any video recommendations to start with the basics?

No, it doesn't. Read again some of the responses above. Foreign exchange reserves have nothing to do with individual investments. In spending, foreign exchange reserves must be carried out through government policy for domestic economic interests. However, you can liquidate your investment at any time for your own benefit. The two won't fundamentally influence each other.

Saving of foreign exchange reserves is a good step to stay your economic strength. Now , dollar is used World wide but one should also spend money in good assets like real estate. But dollar can shoot up and also can go down. For strength of country economy,our currency stability matters a lot and
if our currency is stable then no need to take reserve as a foreign currencies then foreign countries will buy things by our country ,one should make strong their currency but this is hypothetical situation due to many reasons.Politics matters a lot to  make strong or weak our currency .

High demand for scarce goods and services can lead to inflation, or  better still, inflation is created when consumption is greater than productivity. Decrease in Foreign Reserve can only contribute to inflation if the reserve currency is used mostly for consumption of scarce goods and services of the country that owns it.

Your country's Foreign Reserve is nationally rather than individually/privately owned. It decreases when it's spent or sold for another goods/currency by those who control it. It still decreases if your government sell it to you and buy up your local. currency
Selling your local currency for dollar would increase the price of dollar if the demand for dollar is greater than supply, while your local currency would decrease in value if there are more sellers than buyers. Demand for your local currency would organically increase (consequently increasing its value) if your economy have enough better quality goods and services that are in high demand

I can assume that there is a mistake in the question - currency reserves are not an asset that "controls" inflation. Rather, it is an indicator of the quality of the economy, since the foreign exchange reserves show the productivity of the foreign economy, the country's trade turnover and profit for the past years. By its state we can judge about the state of economy of a certain state. This suggests that gold reserves also serve as emergency reserves in case of economic collapse, giving strength to recover.

The only nuance is that by selling reserve currency on the domestic market, the government can "smooth" inflation or speculative movements on the currency market

I assume that the answer is yes, because if an individual deposits an amount of $10,000, for example, in any bank within the country, it is part of the foreign reserve present inside the country and does not leave abroad, so I think.

As long as your money is in the central banks under the control of the government, it is certain that it is considered part of the state’s foreign reserves, and they will certainly use it in the event of a shortage of foreign exchange reserves in the government’s treasury.

This means that in theory you are the owner of the foreign exchange in your bank account, but the real owner is the government.

Yes of course! I believe I've already answered it as part of deposits/banknotes (through banks) is part of the foreign reserves. Only that the central bank is the reserve custodial, you can't remove it.

Removing the central bank, then what you are trying to establish is simply "Impossible," the central bank has to be involved to call it a "Reserve", mere banks can't reserve for the nation, they are only a "Means," but the deposits through them counts.

There can't be any foreign reserve without the central banks as they are the ones with the obligations, they have the central link/control of all banks which individual banks lack, so without them, your "Deposit" is just a deposit as there is no central control to add the deposit to be named a "Reserve" at all. It's just an asset with the bank.

Does it always have to be "currency" per se? I was put under the impression that foreign reserves could be anything that has value and from a different country, like resources used to pay off national debt for instance. From a macro level of management such as a country, it doesn't make sense to hold on to money and use it as a form of systemic store of value for when times are tough, that's a little skewed. It makes much more sense for it to be stuff that has inherent value, like resource or perhaps anything that came from the country of relevance, so it could systematically decrease in amount and actually be a factor in causing inflation. Although I guess for some countries with a lower population count, the concept may still work.

You understood the concept completely wrong. For example, gold acts as a reserve in every government, and every individual buys gold as an investment/asset it mean the reserves of the country increase? No

The reserve is something that the government holds not including the assets of their citizen and to my knowledge, only USD is considered as a reserve currency, not fiat in general. The important reason is that USD is used for every international trade whether it is between a country in Asia and North America or so on but in recent days things have changed which could change the whole dynamics of the dollar if things become successful I mean if international trades becomes possible without involving USD.

Foreign exchange reserves are assets owned by state authorities to stabilize the regional economy and the money exchange rate. There are many types of foreign exchange reserves, they can be gold, securities, foreign currency, and etc. Countries can obtain foreign exchange reserves by purchasing gold bullion or through import and export trade activities

If someone has the currency of a foreign country and saves it, it does not mean that the country loses foreign exchange but instead increases the exchange rate because of the large demand. For example, many dollars are saved as foreign exchange, so even though USD is printed many times, the exchange rate remains high because market demand for dollars is always high. America is also the country that holds the largest gold reserves

its not actually inflation.. its the FOREX exchange rate changing

when you buy foreign currency it sits in a bank that allows foreign currency. you still have bank balance that remains the same in that currency unit. but the forex rat changes meaning when you convert it back you may get more/less of your native currency back.

the effects of forex rate changes (as a separate thing) do not impact much the day to day purchasing power of goods or services within the nation that use that currency

for instance in the last 3 years... $1 to UK pound
2020 £0.86
2021 £0.70 (↓ 19%)
2022 £0.70 (↑ 37%)

the UK retail market of everyday purchases did not change by a down of 19% or up by 37% due to forex rate changes

however.. international trade of things like oil do fluctuate based on forex.. however.. UK oil when taking advantage of the good times do not trickle down the benefits to the retail price of fuel.

for instance retail products did not get 37% cheaper in 2022-2023.. however UK fuel prices are no longer £1.90 a litre but now £1.50 a litre

You are answering your own question. The foreign currency reserves are held by the central bank of a certain country, not by the citizens of that country in their personal bank accounts. Usually the central banks are holding their currency reserves in other central banks, not in the form of cash, but in the form of highly liquid government/treasury bonds.
In general, having less foreign reserves mean that the central bank of that particular country can't intervene in the currency markets, when the national currency drops down in value. The countries with less foreign reserves tend to have higher inflation levels and less valuable national currencies.
When more people want to open bank accounts in USD or Euro, this means that the demand for USD/EURO in that country does up and the demand for the local currency does down. This means that the local currency becomes less valuable.

I think the answer is No, the reason being that the individual having such foreign currency in their domi account will count it as an investment for themselves, whereas the one kept by the government is a reserve for the nation's economy. You said it already on the OP (which I think you already have your answer to there). If the value of the government foreign reserve is positive, that means the country's economy will be good, but if it's an individual account that holds some foreign currency and perhaps the value is positive, that means it's profitable to the individual alone.

The result of foreign is used by every country to import goods from Bangladesh, so it is a strong asset of every country and when the foreign reserve of a country decreases, many problems appear in that country, especially the increase in the price of goods, no country can run alone because every country is one.  The country is dependent on other countries and has to import goods from other countries, so in that case foreign reserves are necessary, otherwise imports will stop and the country will be in danger.

What I am saying is that if central bank reserve is not mentioned, are citizens money in domiciliary account counts to be part of the foreign reserves in the country?

I'm not well-versed in economic matters, but I believe this is a mistaken assumption. How can they increase the value of a local currency? Do you mean an increase in the quantity, like printing more money? Central banks can do that, and even the US did so during the pandemic by printing more money.

The US printed more than $3 trillion in 2020 alone. Here’s why it matters today

First, you might want to change the domiciliary account to something like a USD/foreign currency account for more people to understand. My experience with international dealings shows that domiciliary accounts are known in Nigeria and perhaps a very few other countries.

As for the question, Foreign reserves are the assets in the care of the central banks of a country and they could be bonds, deposits/banknotes and other securities backed by the government and contractual agreements. In your case, the deposit is part of it, but mind you, the reserves are often used to back liabilities as well. Just because you deposited $1000 doesn't mean that a liability of $5000 will not happen on the same day. So, as you deposit your foreign currency, the bank merely owes you that amount but that doesn't mean that particular deposit wouldn't be spent as the foreign reserves continue to find the concluding summation between the country's assets and liabilities. And if citizens do not spend from the reserve, the government might.

In case all of the citizens didn't spend FX but deposited, the government would still sustain their foreign obligations. But in this case, if the government earns more FX on their own, then it won't depend on citizens' FX savings and the foreign reserves will not be affected but increase. In case both the government and citizens decide not to spend their foreign reserves but add to it, of course, it will continue to grow.

Foreign reserves are the foreign currencies reserved by the government of a nation. If the reserve is decreasing, the central bank increase the price of their local currency leading to inflation. A positivity in the value of the foreign reserves indicates good economy.

I just want to ask a question. Assuming people are buying the foreign currencies and hold it in their domiciliary account and not used in another country for buying of goods to be imported, is the foreign reserves decreasing like that? I mean if the foreign currencies is bought by the citizens of a country and hold in their bank account, and not used to buy from another country.