IDEAS home Printed from https://ideas.repec.org/a/ers/journl/vxxivy2021i1p568-582.html
   My bibliography  Save this article

The Size and the Main Determinants of China’s Official Currency Reserves in the Period 1990-2019

Author

Listed:
  • Piotr Misztal

Abstract

Purpose: This paper aims to analyze the size of China's Central Bank's foreign exchange reserves and the main determinants of changes in China's foreign reserves. The publication attempts to prove two theses. According to the first thesis, the current foreign exchange reserves level in China has been higher than the optimal level suggested by the foreign exchange reserves adequacy ratios. However, in line with the second thesis, the most important factors determining China's foreign exchange reserves were changes in the value of imports and changes in the level of China's short-term foreign debt. Design/Methodology/Approach: The study uses a research method based on literature studies in the field of banking and international finance and econometric methods (the classic least squares method). The selection of these research methods and their use are elements of the author's approach to the problem of the optimal level of foreign exchange reserves in China. Findings: Research revealed that for almost the entire period 1990-2019, the value of China's foreign exchange reserves was higher than the optimal values, as suggested by the adequacy ratios of currency reserves. The exceptions were the ratio of the optimal level of foreign exchange reserves, calculated as 20% of the M2 money supply, and the ratio calculated by the IMF methodology for countries with constant exchange rates. China's relatively high foreign exchange reserves were adequately hedged against the possible effects of economic crises, while the relatively high level of these reserves led to their low profitability. The analysis results indicated that changes in the value of China's foreign exchange reserves were, to the greatest extent, determined by the inflow of foreign direct investment and changes in import expenditure. Practical Implications: The discussion on the accumulation of foreign reserves should have practical implications and be set to eliminate threats, not to individual economies but to maintain global financial stability in the world. On the other hand, the currency reserves adequacy indicators themselves should be used flexibly and should reflect individual countries' economic specificities. Originality: So far, no such comprehensive research has been carried out on the magnitude and determinants of China's foreign reserves changes. What is more, the analysis covers a long period of research (1990-2019) and is based on the proprietary model, estimated with the use of econometric tools.

Suggested Citation

  • Piotr Misztal, 2021. "The Size and the Main Determinants of China’s Official Currency Reserves in the Period 1990-2019," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 568-582.
    • Handle: RePEc:ers:journl:v:xxiv:y:2021:i:1:p:568-582
    as

    Download full text from publisher

    File URL: https://ersj.eu/journal/1981/download
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Guillermo Calvo & Alejandro Izquierdo & Rudy Loo-Kung, 2013. "Optimal Holdings of International Reserves: Self-insurance against Sudden Stops," Monetaria, CEMLA, vol. 0(1), pages 1-35, January-j.
    2. Grubel, Herbert G, 1971. "The Demand for International Reserves: A Critical Review of the Literature," Journal of Economic Literature, American Economic Association, vol. 9(4), pages 1148-1166, December.
    3. Dani Rodrik, 2006. "The social cost of foreign exchange reserves," International Economic Journal, Taylor & Francis Journals, vol. 20(3), pages 253-266.
    4. Silviu Carstina & Marian Siminica & Daniel Circiumaru & Anca Bandoi, 2015. "Country Risk Decision-Maker in Applying the Yield Cash-Flow Estimate," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 1-79–89.
    5. Eduardo Levy Yeyati, 2019. "The Cost of Holding Foreign Exchange Reserves," CID Working Papers 353, Center for International Development at Harvard University.
    6. Dominguez, Kathryn M.E., 2012. "Foreign reserve management during the global financial crisis," Journal of International Money and Finance, Elsevier, vol. 31(8), pages 2017-2037.
    7. Eduardo Levy-Yeyati & Juan Francisco Gómez, 2020. "The Cost of Holding Foreign Exchange Reserves," Springer Books, in: Jacob Bjorheim (ed.), Asset Management at Central Banks and Monetary Authorities, edition 1, chapter 0, pages 91-110, Springer.
    8. Biljana Jovanovikj & Danica Unevska Andonova, 2017. "The Optimal Level of Foreign Reserves in Macedonia," Working Papers 2017-05, National Bank of the Republic of North Macedonia.
    9. Shihong Zeng, 2012. "Study on Chinese foreign exchange reserves," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 2(1), pages 1-2.
    10. Graciela Laura Kaminsky, 1999. "Currency and Banking Crises: The Early Warnings of Distress," IMF Working Papers 1999/178, International Monetary Fund.
    11. El. Thalassinos & Th. Kiriazidis, 2003. "Degrees Of Integration In International Portfolio Diversification: Effective Systemic Risk," European Research Studies Journal, European Research Studies Journal, vol. 0(1-2), pages 119-130, January -.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Eduardo Levy-Yeyati & Juan Francisco Gómez, 2022. "Leaning-Against-the-Wind Intervention and the “Carry-Trade” View of the Cost of Reserves," Open Economies Review, Springer, vol. 33(5), pages 853-877, November.
    2. Federico Sturzenegger, 2020. "How should Central Banks accumulate reserves?," Working Papers 139, Universidad de San Andres, Departamento de Economia, revised May 2020.
    3. Yeonjeong Lee & Seong-Min Yoon, 2020. "Relationship between International Reserves and FX Rate Movements," Sustainability, MDPI, vol. 12(17), pages 1-24, August.
    4. Falk Hendrik Laser & Jan Weidner, 2022. "Currency Compositions of International Reserves and the Euro Crisis," Open Economies Review, Springer, vol. 33(5), pages 917-944, November.
    5. Monnet, Eric & Puy, Damien, 2020. "Do old habits die hard? Central banks and the Bretton Woods gold puzzle," Journal of International Economics, Elsevier, vol. 127(C).
    6. Carmen M. Reinhart & Takeshi Tashiro, 2013. "Crowding out redefined: the role of reserve accumulation," Proceedings, Federal Reserve Bank of San Francisco, issue Nov, pages 1-43.
    7. Hur, Sewon & Kondo, Illenin O., 2016. "A theory of rollover risk, sudden stops, and foreign reserves," Journal of International Economics, Elsevier, vol. 103(C), pages 44-63.
    8. Abdoul’ Ganiou Mijiyawa & Djoulassi K. Oloufade, 2023. "Effect of Remittance Inflows on External Debt in Developing Countries," Open Economies Review, Springer, vol. 34(2), pages 437-470, April.
    9. Javier Bianchi & Juan Carlos Hatchondo & Leonardo Martinez, 2018. "International Reserves and Rollover Risk," American Economic Review, American Economic Association, vol. 108(9), pages 2629-2670, September.
    10. Yun, Youngjin, 2020. "Reserve accumulation and bank lending: Evidence from Korea," Journal of International Money and Finance, Elsevier, vol. 105(C).
    11. Corneli, Flavia & Tarantino, Emanuele, 2016. "Sovereign debt and reserves with liquidity and productivity crises," Journal of International Money and Finance, Elsevier, vol. 65(C), pages 166-194.
    12. Mile Bošnjak & Vlatka Bilas & Gordana Kordić, 2020. "Determinants Of Foreign Exchange Reserves In Serbia And North Macedonia," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 65(226), pages 103-120, July – Se.
    13. Layal Mansour, 2014. "The Power of International Reserves: the impossible trinity becomes possible," Working Papers halshs-01054614, HAL.
    14. Gupta, Rangan & Hammoudeh, Shawkat & Kim, Won Joong & Simo-Kengne, Beatrice D., 2014. "Forecasting China's foreign exchange reserves using dynamic model averaging: The roles of macroeconomic fundamentals, financial stress and economic uncertainty," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 170-189.
    15. Samano, Agustin, 2022. "International reserves and central bank independence," Journal of International Economics, Elsevier, vol. 139(C).
    16. Laser, Falk Hendrik & Weidner, Jan, 2020. "Currency compositions of international reserves and the euro crisis," Darmstadt Discussion Papers in Economics 238, Darmstadt University of Technology, Department of Law and Economics.
    17. Javid Suleymanli, 2022. "Differences in the Determinants of National Reserves across G7 and Rising Power Countries," International Journal of Energy Economics and Policy, Econjournals, vol. 12(2), pages 431-443, March.
    18. Frankel, Jeffrey & Saravelos, George, 2012. "Can leading indicators assess country vulnerability? Evidence from the 2008–09 global financial crisis," Journal of International Economics, Elsevier, vol. 87(2), pages 216-231.
    19. Pilar Piqué, 2016. "La jerarquía de monedas nacionales y los problemas financieros actuales," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 18(34), pages 69-85, January-J.
    20. Albertazzi, Ugo & Gambacorta, Leonardo, 2009. "Bank profitability and the business cycle," Journal of Financial Stability, Elsevier, vol. 5(4), pages 393-409, December.

    More about this item

    Keywords

    Foreign exchange reserves; macroeconomic stability central bank.;

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • 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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ers:journl:v:xxiv:y:2021:i:1:p:568-582. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Marios Agiomavritis (email available below). General contact details of provider: https://ersj.eu/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.