China's foreign exchange reserves (forex) have exceeded 1 trillion US dollars, which is not only a record in China, but the world. The world has been shocked by China's ever-expanding foreign exchange reserves, and some Chinese economists also believe that excessive reserves might create problems. Are China's enormous foreign exchange reserves a good or a bad thing? What does this mean for the country?

Passing the 1 trillion US dollar mark affects not only how we perceive the role of foreign exchange reserves and China's policy on foreign exchange reserves, but also the adjustments China needs to make to domestic and foreign economic policies.

In my opinion, although the rapid growth of forex may have some undesirable effects, we do not need to worry too much. We should in fact be pleased that forex reserves are so substantial because rapid growth will do more good than harm in comparison to a long-term shortage of foreign exchange reserves, as we have seen in the past.

Foreign exchange reserves come from a surplus in foreign trade and are an indication of a country's economic strength over others. We cannot simply make a judgment based on the size of the reserves; economic strength should be taken into account when weighing the advantages against the disadvantages.

We should be glad rather than sorry because China's reserves imply China's economic strength is growing. As long as China's economic growth is healthy and sound, the growth of foreign exchange reserves is inevitable. Overlooking the interdependence between foreign exchange reserves and economic growth to curb the growth of foreign exchange reserves would eventually lead to economic slowdown.

China's RMB is not yet fully convertible, but the currency will eventually become convertible in the process of internationalization without reference to China's booming economy, financial development or currency changes.

Both domestic and international experience shows that the size of a country's forex reserves is closely tied to a country's currency convertibility and currency internationalization.

Since 1994, China has made its currency convertible under the current account. It formally accepted the obligations of Article 8 of the accord of the World Bank in 1997. In 2002, after realizing the RMB's full convertibility under the current account, there appeared signs of loosened restrictions on convertibility under the capital account. This can be attributed to ever-increasing foreign exchange reserves.

When the RMB is fully convertible and its status in the international market is stronger, we should be careful not to ignore the importance of large foreign exchange reserves.

The world economy remains uncertain. Although there are no major dramas in the international finance market, we cannot totally relax. On the contrary, international speculative ventures, such as the 1997 Asian financial crisis, can be stirred up again if the situation permits.

Adequate foreign exchange reserves have been shown to be an effective way of fighting international speculative attacks and defending against a financial crisis. If Thailand had had sufficient foreign exchange reserves, the 1997 financial crisis would not have worsened or extended to other areas. If South Korea had a large stockpile of foreign exchange reserves, the government would not have to resort to drawing funds from the people to get through difficult periods. Hong Kong survived the 1997 crisis because it held large foreign exchange reserves. China made a commitment during the turmoil not to devalue yuan on the strength of its 100 billion US dollar foreign exchange reserves.

"Recreating Asia", published by the World Bank, revealed that East Asian countries have accumulated more than 2 trillion US dollars in foreign exchange reserves. This is the major reason East Asia did not collapse financially. Consequently, calls to stop stockpiling foreign exchange reserves are inappropriate.

Though China's foreign exchange reserves have surpassed 1 trillion US dollars, there is not sufficient reason to believe that the current foreign exchange reserves are excessive. China has more than 1.3 billion people, and if distributed per capita, China's foreign exchange reserves are less than US$800 per person, very small on a world scale. In comparison to countries and regions with significant foreign exchange reserves, such as Japan, Taiwan and Hong Kong, China still has a large gap in terms of per capita forex reserves. Since these countries and regions are not panicking, why should China be anxious? It would be much better if we employed foreign exchange reserves in building a harmonious society or even a harmonious world.

Editor: Yan