The Phenomenon Of High Cost And Low Benefit In China's Foreign Exchange Cycling

This paper analyses the balance-of-payment situation in China and finds one of the most important sources of foreign exchange reserves in China, i.e. net inflows of foreign direct investment. Then the rate of return on common stockholders' equity (ROE) in foreign funded enterprises is chosen to measure the cost in China's importing foreign capitals. By averaging the ROE from the year of 1999 to 2003 in forty-six foreign funded listed companies, this paper gets the cost is 7.14%. As to the benefit, the rate of return on foreign exchange reserves investment is chosen to measure the benefit in China's exporting net savings. This paper makes usage of the statistics about the currency composition in developing countries and adjusts the composition with Heller-Knight model and Dooley model. With the rate of return in targeted foreign financial assets, this paper gets the benefit is only 3.83%. Without the impact of other factors, China loses 3.31% in importing and then exporting foreign exchanges. The huge gap between cost and benefit indicates some problems in capital usage and even in financial mechanism in China.