Foreign exchange reserves of China

The Foreign exchange reserves of China are mainly composed of US dollar in the forms of US government bonds and institutional bonds, and excludes reserves held by Hong Kong and Macau. As of the end of 2012, the reserve holds $3.3 trillion,[1] making it the highest foreign exchange reserve in the world. The reserve is governed by State Administration of Foreign Exchange and People's Bank of China. An estimated two-thirds of these reserves are held in dollar-denominated assets whilst it is predicted that a quarter of the reserves are euro-denominated.

China also manages $200 billion to $400 billion in additional foreign exchange assets that are not counted as official reserves, the China Investment Corporation.

Composition

The composition of foreign exchange reserves is presently regarded as a state secret in China. All financial records pertaining to the foreign exchange reserve have been poorly documented. The official sources elaborate that US dollar holdings make up 60% of the reserve, and that a fifth (up to 400 billion USD) of the reserve is held in Fannie Mae and Freddie Mac bonds. As of June 2008, China held USD 447.5 billion of US agency bonds.[2] The reports from the Bank for International Settlements, released by Reuters, reported that the US currency represents most of the settlements of China’s international trade. An unofficial spokesperson considered that the US dollar asset accounts represent 70% of the reserve, as the Japanese yen takes up about a 10% portion, while the Euro and the British pound occupy the rest.

There are some historical and international finance reasons lying behind this composition:

Concerns

Costs for Reserve

US dollar asset accounts make up a large proportion of China’s foreign exchange reserves, and China does not have diversified channels to preserve the value of these reserves. The book value of these assets fell significantly after the year 2000 due to a depreciation of the US dollar. Analysts commented that the value fell by roughly $20 billion in 2003, and in the first half of 2004 by roughly $40 billion.

Risk of Liquidity

Finance officials in the management of China’s foreign exchange reserve pointed out, “It is of great importance to pay particular attention on the security and liquidity in the management of foreign exchange reserve. This concerns determines that reserves would mainly be invested into bonds with higher credit ratings in international markets”, and also “instead of keeping these foreign currencies be kept until maturity, purchases will be made in high return, low risk foreign bonds.” However, about 60% of this reserve, amounting to hundreds of billions, exists taking the form of US government bonds and debentures. This leads to poor liquidity in government bonds and becomes an issue as this topic poses a threat in Sino-US relations.

Diversification

China has made gradual diversification and restructuring an important policy initiative by holding a larger share of currencies and asset classes other than the dollar and US government debt due to the concerns about the depreciation of the US dollar, and higher interest rates in the medium term.

The government is supporting the increase in the diversity in the group of holders and managers of China's overall foreign exchange assets, leaving more in the hands of the corporations, the banks and individuals; promotion and encouragement of outward direct investment and increased portfolio outflows, as well as more external lending by corporations and banks, to reduce the accumulation of official reserves; Stabilizing the exchange rate; Increasing its purchase of gold and other commodities. The pace and degree of diversification is limited by the current global trade and financial system, where the dollar still dominates in transactions, asset holdings and official reserves. Before an alternative is developed to change the central role of the dollar as the dominant reserve currency, it is not expected that China will hold less than 50 percent of its official reserves in dollar assets - even in the medium term. When the US dollar reaches a peak depreciation level a new reserve currency will be established and or a new currency will be introduced into the global market.

See also

References

  1. ↑ Urbanek, Vladimir. "China's foreign exchange reserves at the end of 2012 grew to 3.3 trillion, from +700% L.04". KurzyCZ. KurzyCZ. Retrieved 26 March 2013.
  2. ↑ "China may cut its dollar holdings". china.org.cn. 2008-09-12. Retrieved 2008-09-16.

External links