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Mercantilism and China's hunger for international reserves

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  • Schröder, Marcel

Abstract

This paper is motivated by the popular view that the surge in China's foreign exchange reserves is due to a distortionary exchange rate policy aimed at keeping the real exchange rate undervalued to support export-led growth. It undertakes an in-depth empirical investigation to quantify how much “mercantilist” and “precautionary” motives have contributed to the reserve build-up in China during 1998Q4-2011Q4. A substantial problem is that theory is consistent with employing two vastly differing approaches to defining and estimating the role of mercantilist reserve accumulation. A priori, either method could generate misleading results. The study shows, however, that the distinction between the two approaches is immaterial in China's case. The results suggest that mercantilism accounts for less than 10% of reserve accumulation. Precautionary motives and other factors seem to be the dominant determinants of the surge in China's international reserves.

Suggested Citation

  • Schröder, Marcel, 2017. "Mercantilism and China's hunger for international reserves," China Economic Review, Elsevier, vol. 42(C), pages 15-33.
    • Handle: RePEc:eee:chieco:v:42:y:2017:i:c:p:15-33
    DOI: 10.1016/j.chieco.2016.11.004
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    More about this item

    Keywords

    International reserves; Precautionary demand; Mercantilism; China;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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