This is the second post paying homage to the Pettis explanation of the role of China’s foreign reserves.
The bank of China holds massive foreign reserves. That is agreed. What is far less clear is what these reserves can be spent on. The man in the street might say – “use the money to build hospitals and schools”.
Pettis explains how it really works. This is good and well explained economics (certainly better than I could do without spending a lot of time).
It is important that as many people understand the arguments here as possible especially journalists and fellow economists.
What Pettis misses is that whilst the economics is correct he underestimates the importance of the group of losers he labels “exporters” and the associated jobs. Job creation in China is crucial to maintain political stability. There is a cost to maintaining a low RMB value against the dollar but I suspect the Chinese government sees this as a price worth paying (for the time being).
Can PBoC reserves protect China? [China Financial Markets]
Originally published at China Economics Blog and reproduced here with the author’s permission.
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