The continuing appreciation of the renminbi exchange rate - which gradually reduces the value of foreign assets in renminbi terms - can reach the extent that a larger holding of foreign reserves is not necessarily a good indication that the financial position of the central bank is stronger, Monetary Authority Chief Executive Joseph Yam says.

While there has been little accumulation of foreign reserves in Hong Kong, when there is an increase in foreign reserves held in the Exchange Fund, chances are that this is matched by an increase in the accumulated surplus, or the capital and reserves, of the Exchange Fund, he said.

In his latest Viewpoint article, Mr Yam said since there is no interest paid on the accumulated surplus, foreign-reserve accumulation in Hong Kong does mean the Exchange Fund's financial position is improved.

This is one reason why we pay little attention to our world ranking in terms of foreign-reserves holdings, he added.

He said the accumulation of foreign reserves on the Mainland results from a current-account surplus, capital inflow and exchange control.

To prevent the increase in the monetary base from leading to too-loose monetary conditions, there is a need to "sterilise" the undesirable monetary effects of the injection of money.

PBOC keeps close watch on monetary conditions

The People's Bank of China does this, on the one hand, by increasing the reserve requirement ratio - now at 9% - and, on the other, by issuing paper to the banks. 

He said US$1 trillion is, of course, a huge number and there are many foreign assets that it can buy, apart from the usual liquid financial obligations developed countries issued in their currencies.

"For a big and fast-growing developing country like China, there are many needs to be satisfied, such as the continued availability of strategic commodities, which is quite a legitimate area for some strategic allocation of financial resources. Indeed, this is in the national interest.