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The International Financial Crisis and China's Foreign Exchange Reserve Management

Author

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  • Wang, Yongzhong
  • Freeman, Duncan

Abstract

The US financial crisis and subsequent European sovereign debt crisis not only constitute serious threats to the security of China’s foreign exchange reserves, but also provide an advantageous opportunity for China to change its ideas on foreign exchange reserve management. First, according to rules of thumb, the authors assess the optimal size of China’s foreign exchange reserves in terms of short-term external debt, imports and domestic liquid assets. Second, the paper estimates the asset structure of China’s foreign reserves based on the statistics on China’s holding of US and Japanese securities. Third, the authors calculate the People’s Bank of China sterilization costs from the perspective of issuing central bank notes and raising required reserve ratios. Fourth, the paper measures the total and net investment yield of China’s foreign reserves in terms of nominal dollars, real dollars (dollar index) and nominal renminbi. Finally, the authors put forward suggestions on how to accelerate the diversification of China’s international reserves.

Suggested Citation

  • Wang, Yongzhong & Freeman, Duncan, 2013. "The International Financial Crisis and China's Foreign Exchange Reserve Management," MPRA Paper 49510, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:49510
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    More about this item

    Keywords

    International financial crisis; foreign exchange reserves; management; diversification.;

    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
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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