Foreign exchange reserve of the People's Republic of China
Encyclopedia
The Foreign exchange reserves of the People's Republic 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 March 2011, the reserve holds $3.0447 trillion
, making it the highest foreign exchange reserve in the world and far exceeded holdings of the next largest holder, Japan
(~$1 trillion). The reserve is governed by State Administration of Foreign Exchange
and People's Bank of China
all of which are under operation of the Bank of China
. An estimated two-thirds of these reserves are held in dollar-denominated assets.
China also manages $200 billion to $300 billion in additional foreign exchange assets that are not counted as official reserves.
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, the PRC held USD 447.5 billion of US agency bonds. 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:
, 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.
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.
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
and Macau
Macau
Macau , also spelled Macao , is, along with Hong Kong, one of the two special administrative regions of the People's Republic of China...
. As of the end of March 2011, the reserve holds $3.0447 trillion
Trillion
-Numbers:Either of the two numbers :* 1,000,000,000,000 for all short scale countries...
, making it the highest foreign exchange reserve in the world and far exceeded holdings of the next largest holder, Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
(~$1 trillion). The reserve is governed by State Administration of Foreign Exchange
State Administration of Foreign Exchange
The State Administration of Foreign Exchange of the People's Republic of China is an administrative agency tasked with drafting rules and regulations governing foreign exchange market activities, and managing the state foreign exchange reserves, which at the end of July 2011 stood at $3.2 trillion...
and People's Bank of China
People's Bank of China
The People's Bank of China is the central bank of the People's Republic of China with the power to control monetary policy and regulate financial institutions in mainland China...
all of which are under operation of the Bank of China
Bank of China
Bank of China Limited is one of the big four state-owned commercial banks of the People's Republic of China. It was founded in 1912 by the Government of the Republic of China, to replace the Government Bank of Imperial China. It is the oldest bank in China...
. An estimated two-thirds of these reserves are held in dollar-denominated assets.
China also manages $200 billion to $300 billion in additional foreign exchange assets that are not counted as official reserves.
Composition
The composition of foreign exchange reserves is presently regarded as a state secret in the People's Republic of China. All financial records pertaining to the foreign exchange reserve have been poorly documented. The official sources elaborate that US dollarUnited States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
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, the PRC held USD 447.5 billion of US agency bonds. The reports from the Bank for International Settlements
Bank for International Settlements
The Bank for International Settlements is an intergovernmental organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government...
, 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
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
asset accounts represent 70% of the reserve, as the Japanese yen
Japanese yen
The is the official currency of Japan. It is the third most traded currency in the foreign exchange market after the United States dollar and the euro. It is also widely used as a reserve currency after the U.S. dollar, the euro and the pound sterling...
takes up about a 10% portion, while the Euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
and the British pound
Pound sterling
The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
occupy the rest.
There are some historical and international finance reasons lying behind this composition:
- First off, the bond issuer’s economy should be domestic primarily. Even though US transaction make up a large proportion in international trade, compared with its huge domestic GDP, it is still a small part of the global trade. Measured with other countries, US trade is not as low as that of Japan, Germany and Switzerland respectively. Those latter countries rely heavily on international trade, thus their currency value easily fluctuates in gross proportion along with the international flow of capital. This phenomenon poses a disadvantage to their values; moreover, unlike the US, the central banks of Japan, Germany and Switzerland reject the US currency and adopt their own currencies therefore taking a larger role in international financial markets.
- Secondly, historically the US Dollar has been used as means of payment, an intermediary of transactions, and a means of valuation in treasury. Two thirds of international trade is settled by the US dollar. Moreover, wholesales in international financial markets, banks, open markets and operations are mainly conducted in US dollars. The US dollar in assets are also the main foreign exchange reserve for big countries. Finally, international syndicated loan and international bonds trading are nearly wholly traded in US dollars or US bonds.
Costs for Reserve
US dollar asset accounts make up large proportion 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 devaluation 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 maturityMaturity (finance)
In finance, maturity or maturity date refers to the final payment date of a loan or other financial instrument, at which point the principal is due to be paid....
, 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 depreciationDepreciation
Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....
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
- Amero
- Foreign exchange reservesForeign exchange reservesForeign-exchange reserves in a strict sense are 'only' the foreign currency deposits and bonds held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, Special Drawing Rights and International Monetary Fund reserve positions...
- World CurrencyWorld currencyIn the foreign exchange market and international finance, a world currency, supranational currency, or global currency refers to a currency in which the vast majority of international transactions take place and which serves as the world's primary reserve currency...
- State Administration of Foreign ExchangeState Administration of Foreign ExchangeThe State Administration of Foreign Exchange of the People's Republic of China is an administrative agency tasked with drafting rules and regulations governing foreign exchange market activities, and managing the state foreign exchange reserves, which at the end of July 2011 stood at $3.2 trillion...
- List of countries by foreign exchange reserves
- "Dollar trap"
- Import substitutionImport substitutionImport substitution industrialization or "Import-substituting Industrialization" is a trade and economic policy that advocates replacing imports with domestic production. It is based on the premise that a country should attempt to reduce its foreign dependency through the local production of...
External links
- China's foreign exchange reserves, 1977-2008
- China Bond Information Network , the nation’s biggest debt-clearing house.