Thursday, October 19, 2006

A further clarification of the earlier post on whether to use the forex reserve domestically:

I mean that SAFE should set up another investment vehicle which "invests" in special bonds issued by the MOF. For this bond, SAFE uses dollar to pay for the bonds, but the MOF promises to pay the SAFE company back in RMB. Of course, this would introduce the sterilized money back in the economy as MOF would have to exchange the dollar it received from SAFE into RMB. However, this is different from printing money since the MOF ultimately has to use its tax base to pay back SAFE. In this way, SAFE is hedged against a declining dollar since it has RMB assets. Meanwhile, the MOF is not going to take a loss since it is spending the dollar at today's exchange rate, but repay ing in RMB with future revenue streams in exchange rates of the future.

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