Forex and China's Trade Surplus

The forex reserve for China rose to an incredible 1.53 trillion dollars USD in 2007. This is the largest forex reserve in the world. The forex reserve increase has resulted in an extraordinary excess of liquidity for the country which exerts tremendous pressure on the Chinese currency, the Yuan. To deal with this excess, in September of last year, the Chinese government created the CIC, the China Investment Corporate Limited, the country's first state initiated forex investment company. The mission of the CIC will be to invest in foreign financial markets and better manage and leverage the country's forex reserves. The working capital for the CIC was derived by issuing 1.55 trillion Yuan special treasury bonds, the equivalent of 200 billion USD.

China's trade surplus is credited with the year-to-year increases in its foreign exchange reserve. China's trade surplus exceeded a quarter of a trillion dollars USD in 2007. This trade surplus exists in the backdrop of a declining US Dollar and an appreciating RMB, the Renminbi. By the end of 2007, the RMB had appreciated by over 6% against the USD.

As the CIC matures, China will be the major player in the global forex trading market.

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