A World of Known Unknowns: A Closer Look at the Allocation of China’s Foreign Exchange Reserves

In the weeks and months following China’s 3rd Plenum meetings and the US government shutdown, there has been a flurry of statements inside China from policymakers, academics, and news media about the need for China to stop accumulating reserves and diversify its massive US dollar assets. However, as was outlined in a previous post, China’s reserves are still growing. And they are growing from an enormous base. Through September they grew at an annualized rate of more than 14 percent, or $351 billion. With such a large stock, changes in portfolio allocation can have very large effects in certain markets. Indeed, it is one main reason why China is such a large buyer/holder of U.S. Treasury securities and will have trouble fully diversifying away from them – it is the only market deep and liquid enough to absorb China’s surplus balances with relatively little disruption. The International Monetary Fund’s (IMF) Currency Composition of Official Foreign Exchange Reserves (COFER) database is the starting point for most estimates of the composition of China’s reserve portfolio, from a currency standpoint. Although China does not report to the COFER database, many analysts have assumed that China invests its reserves in a similar proportion to those countries that do report. This post takes a closer look at a wide range of bilateral data in order to ascertain a more accurate estimate of those holdings.

It is not possible to fully account for China’s reserves with public data currently available as China does not report any allocation and many important foreign countries do not report the sources of inward investment.  Even countries that do report investment sources do not distinguish by type of investor.

The IMF records four categories of outward investment: direct investment, portfolio investment, other investment (mainly banking), and official reserve assets.  Most countries allocate inbound investment into only the first three categories, so that China’s sizable official reserves are mainly recorded as portfolio investment liabilities.[1] As of year-end 2012, China’s foreign exchange reserves totaled $3.3 trillion and non-reserve portfolio investment totaled $0.2 trillion.  Most of the latter consists of other official assets,[2] as outward private investment in China’s Qualified Domestic Institutional Investor (QDII) program currently has a quota of $82 billion.[3]

Exhibit 1: Accounted-For Chinese Official Foreign Asset Holdings (LHS)* and COFER Shares of Allocated Reserves (RHS)

*U.S. data through June 2012. Other data through year-end 2012

Source: US Treasury, Bank of Japan, Japan Ministry of Finance, Financial Supervisory Service of Korea, Australian National Statistics, Canada Statistics, Deutsche Bundesbank, European Central Bank, International Monetary Fund

At the end of 2012, approximately $2.2 trillion of China’s official foreign assets could be accounted for out of a total of $3.5 trillion.  Those accounted-for reserves include Chinese official holdings of about $1,700 billion of US assets, $285 billion of Japanese assets, $15 billion of Korean assets, $66 billion in German assets, $27 billion in Canadian assets, and $1 billion in Australian assets.

U.S. Assets

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