An alternative approach to international finance: China's official reserve accumulation

Abstract

This thesis seeks to develop an alternative conceptual framework through which to understand international finance. It then applies this framework to the case of China’s recent official foreign exchange accumulation. One view of international financial relations suggests an agenda of state-to-state financial relations, especially in terms of financial power relations between nations (Andrews et.al. 2006). Another view suggests that finance, while being globally mobile, expresses clear national characteristics such that the aggregation of financial transactions will tell a coherent national story, such as a story of mercantile policy rooted in national trade and payments imbalances (Goldstein 2004). This thesis develops an explanatory critique of these approaches, and suggests an alternative theoretical approach to understanding international financial relations. It does this by augmenting a theory of international financial intermediation — understood as a socially determined, value-chain driven process of cross-border and crosscurrency financial transformation by and through international financial intermediary institutions(Scholtens and Van Wensveen 2003) — with a strategic relational approach to state policy. This framework is then applied with a view to understanding the development of a process of official foreign exchange accumulation by China’s monetary authorities. It seeks to account for why Chinese official reserve accumulation has predominately taken the form of US dollar assets, and to explain recent pressures and responses by China’s authorities to their official US dollar ‘liquidity dilemma’. This thesis argues that the recent pattern and level of China’s foreign exchange accumulation is primarily a secondary by-product of other foreign exchange, monetary and financial risk-mitigation objectives which operate in the context of a rising structural surplus and rising inflows of foreign exchange liquidity. Finally, despite the popular view, this pattern of recent official reserve accumulation has been a relatively durable two-way international financial intermediary relationship. China’s authorities will continue to accumulate US government debt securities unless they decide to ‘float’ the exchange rate. Even then, while the cross-border intermediaries would change — from official to commercial intermediaries — the pattern of international asset accumulation is likely to continue.