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Mercantilism and China’s hunger for international reserves

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  • Marcel Schroder

Abstract

This paper is motivated by the popular view that the surge in China’s foreign exchange reserves is due to a distortionary exchange rate policy aimed at keeping the real exchange rate undervalued to support export-led growth. It undertakes an in-depth empirical investigation to quantify how much "mercantilist" and "precautionary" motives have contributed to the reserve build-up in China during 1998Q4-2011Q4. A substantial problem is that theory is consistent with employing two vastly differing approaches to defining and estimating the role of mercantilist reserve accumulation. A priori, either method could generate misleading results. The study shows, however, that the distinction between the two approaches is immaterial in China’s case. The results suggest that mercantilism accounts for less than 10 percent of reserve accumulation. Precautionary motives and other factors seem to be the dominant determinants of the surge in China’s international reserves.

Suggested Citation

  • Marcel Schroder, 2015. "Mercantilism and China’s hunger for international reserves," Departmental Working Papers 2015-04, The Australian National University, Arndt-Corden Department of Economics.
    • Handle: RePEc:pas:papers:2015-04
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    References listed on IDEAS

    as
    1. Kym Anderson & Anna Strutt, 2014. "Emerging economies, productivity growth and trade with resource-rich economies by 2030," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 58(4), pages 590-606, October.
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    More about this item

    Keywords

    international reserves; precautionary demand; mercantilism; China;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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