The Role of Sovereign Wealth Funds in Managing China’s Foreign Exchange Reserves

This research analyzes the role of sovereign wealth funds in the mechanism of China’s international reserves management. The scope of international reserves application in China is wider than recommended by the International Monetary Fund. International reserves perform more functions than is accepted in accordance with international practice. Additionally, a distinction of managing international reserves in China is the delegation of functions for their investing in international reserve assets and other assets to sovereign wealth funds. The reserves are used as a buffer against external shocks, as well as a tool for stimulating domestic economic development and financing external projects, including the Belt and Road Initiative. This is demonstrated by the example of the portfolio of China’s largest sovereign fund, the China Investment Corporation, which manages a significant part of China’s international reserves. About 40% of the corporation’s portfolio is Chinese assets, mainly invested in the capital of Chinese financial organizations, particularly China’s development banks. A significant part of the corporation’s foreign portfolio is composed not of financial instruments but is invested in the real sectors of countries that are strategically important to China. These investments aim to secure access to domestic markets for goods, services, and technologies.