China's Large and Rising Net Foreign Asset Position

China＇s emergence as a major player in world trade is well known, but its growing role in global finance might have been underappreciated. China is the second largest creditor in the world today, with a net creditorposition of 30 percent of GDP in 2008. We test the importance of the growth differential, demographics, government debt, financial depth and the exchange rate in shaping China＇s net foreign asset position. Our empirical results highlight the sharp fall in the young-age dependence as one key driver behind China ＇s puzzlingly large net lender position and also confirm the neoclassical prediction that faster growth attracts more capital inflows. Looking ahead, our findings suggest that China will unlikely turn into a meaningful net debtor nation over the next two decades.

In search of currency internationalisation: a perspective from financial openness

This paper examines the role of financial openness for currency internationalisation.We provide a theoretical synthesis on the economic and financial channels that financial openness might affect currency internationalisation.Historical experiences from the UK,the US,Japan and Germany show the essential role played by financial policies to promote one currency’s international status.We collect recent data of a panel of countries to provide an in-depth empirical analysis on how financial openness would affect a currency’s acceptance in international official reserves.We find strong evidence that portfolio positions generally have a larger impact on the currency’s share in international reserves than FDI.Moreover,portfolio positions in the liability side,especially foreign investments in domestic debt securities,have a statistically significant and economically important effect on currency internationalisation.Our results have implications for China,highlighting the specific effects of financial policies on RMB internationalisation.

China as a Net Creditor： An Indication of Strength or Weaknesses？

China＇s international investment position is characterized by large net foreign assets, a dominance of low-return foreign exchange reserves and costly foreign direct investment in foreign assets and foreign liabilities. In addition, China＇s foreign investment positions are facing potentially large exchange risks. These features reflect entrenched institutional and structural problems in China, including underdeveloped capital markets, biased resource allocation and a defective social security system. China＇s net creditor status might actually be an indication of weakness rather than strength. To improve its international investment position, China must speed up economic reforms and allow the market to play a fundamental role in resource allocation.

Measuring Net Foreign Assets:The Case of China

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 NFA. 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