Why do USD assets take such a high percentage in China’s foreign exchange reserves

BAI Xiaoyan1 GUO Yehua1

(1.Economics and Management School of Wuhan University)

【Abstract】The share of USD-denominated securities in China’s foreign exchange reserves has been high. This paper estimates the currency composition of China’s foreign exchange reserves over 2010–2016 and identifies its determinants by virtue of Generalized Method of Moments (GMM), with the purpose of revealing the reasons for the dominance of the USD in China’s foreign exchange reserve. The introduction of influencing factors bases on three motives of holding reserves. Since portfolio motive and transaction motive have been widely accepted, this paper focuses on the theoretical analysis of the relationship between precautionary motive and currency composition. The paper finds that factors that reflect transaction motive and precautionary motive are significant, indicating that the USD’s dominant status in China’s foreign exchange reserves is largely due to its extensive use in international payments, such as international trade and international debt payments, as well as its attribute as a global security asset. While factors related to portfolio motive such as yield and risk are insignificant, which explain why China did not reduce dollar assets massively while the sharp depreciation of the dollar and decline in the yield on USD assets after the crisis. In addition, inertia contributes to the maintenance of the dollar’s dominance. The above conclusions provide enlightening significance to understanding currency composition management of China’s foreign exchange reserves and promoting the RMB’s reserve function.

【Keywords】 foreign exchange reserves; USD; China; currency composition; precautionary motive;


【Funds】 Major Research Project of Philosophy and Social Sciences of the Ministry of Education of China (17JZD015)

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(Translated by ZHOU Yufeng)


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    [3]. ① IMF does not separately release data of currency composition of developed and developing countries after the second quarter of 2015. Related data afterwards in this paper is the total volume of all members in the COFER database. [^Back]

    [4]. ②The adjustment steps are as follows: The first is to assume each month during July in a certain year to the next June, the USD treasury volume held by China through offshore account and other methods was at a fixed ratio to the holding volume in the monthly data. Firstly, we calculated the ratio of the holding volume in each month to the holding volume in June (for January, February, March, April and May) or in next June (For July, August, September, October, November and December) in the monthly data, and represented it as w. The second step is calculating the US Treasury held through offshore market in a certain June = holding volume of June in the annual data − holding volume of June in the monthly data. The third step, w multiplies the US Treasury held through offshore market in June/next June to get the US Treasury volume China held through offshore accounts in this month. The fourth step is adding the adjustment of this month to the original monthly data to get the adjusted US treasury volume China held. [^Back]

    [5]. ① The international capital influence data is from the direct investment, security investment, financial derivatives instrument investment and other investment under the capital account and financial account of the international balance sheet, calculated by the sum of the absolute value of balance of the debit and credit of the direct investment, security investment, financial derivatives instrument investment and other investment under the capital account and financial account. [^Back]

    [6]. ① Coefficients lagging the first order of the dependent variable in the OLS estimation and fixed effect model is 0. 9256 and 0. 8203, respectively in the BIS method, and 0. 9111 and 0. 8323 in the IMF method. [^Back]


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This Article


CN: 11-1692/F

Vol , No. 04, Pages 128-143

April 2018


Article Outline


  • Abstract:
  • 1 Literature review
  • 2 Theoretical analysis of precautionary motive and choice of reserve currency composition
  • 3 Empirical analysis
  • 4 Conclusion and policy enlightenment
  • Footnote