Reserve Accumulation and the Entrapment of Chinese Monetary Power

As I have shown in Chapter 2, foreign exchange accumulation by EMEs has been highly conducive to supporting the macroeconomic autonomy of the United States to adopt a financed-led growth regime. China, which had amassed more than US$3.3 trillion in reserve assets by the end of 2012, accumulated reserves on an unprecedented scale over the past decade. China became increasingly vulnerable to external monetary developments as a result of its extraordinary foreign exchange accumulation: not only was the balance sheet of the People’s Bank of China (PBoC) increasingly exposed to an exchange rate appreciation of the renminbi against the dollar; these reserves also reflect an excessive export orientation of the Chinese economy that made it increasingly vulnerable to a downfall in global demand. Why did China accumulate so many reserves that seem to have increased its external monetary vulnerability? By arguing that these reserves have strengthened the macroeconomic autonomy of China to adopt an export-led growth regime, the prevailing interpretation among scholars of IPE appears to be that the benefits of foreign exchange accumulation have exceeded the costs. While these scholars have also drawn attention to the presence of external constraints on the pursuit of China’s monetary power, they have usually narrowed down their argument to the claim that its currency policy has been shaped by its desire to maintain the value of its foreign exchange reserves and to support the competitiveness of its export sector — a claim that follows from Jonathan Kirshner’s concept of “entrapment” (Kirshner 1995).