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Measuring Net Foreign Assets: The Case of China
Author(s) -
Zhu Chao
Publication year - 2010
Publication title -
china and world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.815
H-Index - 28
eISSN - 1749-124X
pISSN - 1671-2234
DOI - 10.1111/j.1749-124x.2010.01214.x
Subject(s) - renminbi , net foreign assets , foreign exchange reserves , valuation (finance) , monetary economics , currency , foreign exchange swap , foreign direct investment , china , valuation effects , current account , economics , foreign exchange , special drawing rights , business , international economics , net asset value , exchange rate , macroeconomics , finance , foreign exchange risk , reserve currency , law , political science
Abstract This paper discusses two methods of measuring net foreign assets(NFA): directly using the financial account and indirectly using the current account. The former method is found to be more accurate than the latter method. The paper also includes a detailed discussion of the valuation methodology. The results show that China's NFA are much lower than the cumulative current account surplus or the cumulative foreign exchange reserves. This leads to an underestimation of growth in foreign direct investment and an overestimation of the capacity of foreign exchange reserves to cope with possible withdrawals. Therefore, the Chinese Government should pay more attention to valuation issues to obtain more accurate measurement of NF A. Meanwhile, the Chinese monetary authority should relax its control on the foreign exchange settlement system, allow the private sector to hold a certain amount of foreign exchange, and encourage foreign assets to be denominated in RMB to solve structural problems, including entity and currency mismatch.