Foreign exchange reserve of the People's Republic of China

The Foreign exchange reserve of the People's Republic of China is mainly composed of dollars in the forms of US. government bonds and institutional bonds. The mainland China (except Hong Kong SAR and Macau SAR) held foreign exchange reserve amounting to $15282.49 billion at the end of 2007, exceeding Japan for the first time, meanwhile topped the world. As the whole country’s asset, foreign exchange reserve of mainland is governed by State Administration of Foreign Exchange and People’s Bank of China, under operation of Bank of China.

Composition of Foreign Exchange Reserve

The composition of foreign exchange reserve is presently regarded as financial secret, and has been poorly documented up to now. The official sources say that US. dollar holdings make 60% of the reserve, that fifth (up to 400 billion USD) of the reserve is held in Fannie Mae and Freddie Mac bonds, that as of June, 2008, PRC held USD 447.5 billion of US agency bonds [cite news | title = China may cut its dollar holdings | publisher = china.org.cn | date = 2008-09-12 | url = http://www.china.org.cn/business/news/2008-09/12/content_16437985.htm | accessdate =2008-09-16 ] . From reports from the Bank for International Settlements, release of Reuters, as well as structure of China’s international trade, somebody considered that US. dollar asset accounts around 70%, Japanese yen takes about 10% portion, while the Euro and the British pound occupy the rest.

Reasons for the Composition

There are some historical and international finance reasons lying behind:First, the issuer’s economy should be domestic economy primarily. Even though US. takes a large proportion in international trade, compared with its huge domestic GDP, it is still a small part, far lower than Japan, Germany and Switzerland respectively. The later ones rely heavily on international trade, thus their currencies value easily fluctuate grossly along with international flow of capital, and finally pose a disadvantage to their values; moreover, unlike US., central banks of Japan, Germany and Switzerland also reject their currencies taking a larger role in international financial markets. Secondly, historically, US. Dollar has been used as means of payment, intermediary of transaction, and means of value treasure. Two the thirds of international trade has been settled by US. dollar. Moreover, wholesales in international financial markets as well as central banks open market operations are mainly conducted by US. dollar. Dollar assets are also the main foreign exchange reserve for big countries. Finally, international syndicated loan and international bonds trading are nearly wholly traded by US. dollar or US. bond.

Concerns

Costs for Reserve

As US. dollar assets account to a large portion in China’s foreign exchange reserve, and China itself meanwhile does not have diversified channels to preserve the value, the book value of which suffered greatly after 2000 when facing big down of dollar. Some people commented that it lost $20 billion of its book value in 2003, and in the first half of 2004, the amount was around $40 billion.

Risk of Liquidity

Someone in management of China’s foreign exchange reserve pointed out, “It is of great importance to pay particular attention on security and liquidity in management of foreign exchange reserve, which further determines that it would mainly be invested into bonds with higher credit levels in international markets”, and also “instead of keeping these foreign currencies stay there alone, we choose to purchase some high return, but low risk, and safe foreign bonds.” However, about 60% of this reserve, amounting to hundreds of billions, exists taking the form of US. government bonds and debentures, which finally leads to poor liquidity, and also is posed under threats of Sino-US. relation, and the scale of US. government bonds.