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Measuring Net Foreign Assets: The Case of China

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  • Chao Zhu

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.

Suggested Citation

  • Chao Zhu, 2010. "Measuring Net Foreign Assets: The Case of China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 18(5), pages 90-104, September.
    • Handle: RePEc:bla:chinae:v:18:y:2010:i:5:p:90-104
    DOI: 10.1111/j.1749-124X.2010.01214.x
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    References listed on IDEAS

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    1. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2001. "The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries," Journal of International Economics, Elsevier, vol. 55(2), pages 263-294, December.
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    Cited by:

    1. Dai, Meixing, 2011. "Motivations and strategies for a real revaluation of the Yuan," MPRA Paper 30440, University Library of Munich, Germany.
    2. Meixing Dai, 2013. "In search of an optimal strategy for yuan’s real revaluation," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 11(1), pages 29-46, February.

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