Explain why the chapter argues that China's foreign exchange capital structure has been "conservative" in recent decades. Relate this to questions of capital mobility and financial crises.
Discuss this in class in the context of the following notes:

Question

Quizplus · Accepted Answer

The Answer is Limited capital mobility, for example, reduces the risk of this major cause of financial crises-so does China really need to protect against such crises? Reserves in months of imports seem globally high. Cost of equity would be reasonable since risk is low from a CAPM approach. The only counter argument relates to a 2004 article by Obstfeld, Stambaugh, and Taylor, "The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility," which argues that a large money supply (which China has) relative to a paucity of assets creates an excess demand for alternatives-a key one would be foreign USD or Euro denominated assets. Therefore, the central bank must hold excess forex reserves as a contingency against a sudden shift out of RMB into USD.

Explain Why the Chapter Argues That China's Foreign Exchange Capital