Chinese Foreign Exchange Reserves, Policy Choices, and the U.S. Economy

Christopher J. Neely

Abstract


China is both a major trading partner of the United States and the largest official holder of U.S. assets in the world. The value of Chinese foreign exchange reserves peaked at just over $4 trillion in June 2014 but has since declined to $3.19 trillion (as of August 2016). This very large decline in foreign exchange reserves is unprecedented, and some analysts have speculated that continued sales of these (mostly U.S.) assets might significantly impact the U.S. and global economies. This article explains the reasons for this large decline in official assets, China’s available policy choices, and how these choices could affect the U.S. economy.

Full Text:

PDF

References


Baig, Taimur and Kalani, Gautam. “Assessing Reserve Adequacy in EM, with a Focus on China.” Duetsche Bank Research, March 14, 2016.

Bajpai, Prableen. “Yuan vs. RMB: Understanding the Difference.” Investopedia, June 11, 2015, updated March 23, 2016;

http://www.investopedia.com/articles/forex/061115/yuan-vs-rmb-understanding-difference.asp.

Bauer, Michael D. and Neely, Christopher J. “International Channels of the Fed’s Unconventional Monetary Policy.” Journal of International Money and Finance, June 2014, 44, pp. 24-46.

Blinder, Alan S. “The Role of the Dollar as an International Currency.” Eastern Economic Journal, Spring 1996, 22(2), pp. 127-36.

Bloomberg News. “China’s Foreign-Exchange Reserves Decline to 3.23 Trillion.” Bloomberg News, February 6, 2016a;http://www.bloomberg.com/news/articles/2016-02-07/china-s-foreign-exchange-reserves-decline-to-3-23-trillion.

Bloomberg News. “China Flags Scope for Policy Stimulus, Tweaks Monetary Stance.” Bloomberg News, February 25, 2016b;

http://www.bloomberg.com/news/articles/2016-02-26/pboc-s-zhou-says-china-still-has-monetary-space-to-aid-economy.

Bradsher, Keith. “China’s Renminbi Is Approved by I.M.F. as a Main World Currency.” New York Times, November 30, 2015; https://www.nytimes.com/2015/12/01/business/international/china-renminbi-reserve-currency.html?_r=0.

Cendrowski, Scott. “Here’s Why China’s Currency Will Be Included in the IMF’s Basket.” Fortune, November 16, 2015;

http://fortune.com/2015/11/16/heres-why-chinas-currency-was-included-in-the-imfs-basket/.

Chang, Gordon G. “China’s Forex Reserves May Already Be Below IMF Safety Line.” Forbes, February 7, 2016; http://onforb.es/1K6Qwxi.

Chen, Fielding and Orlik, Tom. “Something in Reserve? Assessing China’s FX Buffer.” Bloomberg Professional, February 1, 2016; https://www.bloomberg.com/professional/blog/something-in-reserve-assessing-chinas-fx-buffer/.

China Post. “China Cuts Yuan Fix in Biggest Move Since Devaluation.” China Post, June 27, 2016; http://www.chinapost.com.tw/china/chinabusiness//2016/06/27/470491/Chinacuts.htm.

Ebeling, Paul. “China’s Forex Reserves Fell in July, Gold Reserves Up.” Live Trading News, August 7, 2016; http://www.livetradingnews.com/chinas-forex-reserves-fell-july-gold-reserves-11327.html#.WIYvrU0zV9A.

Edwards, Sebastian. “Capital Flows, Real Exchange Rates and Capital Controls: Some Latin American Experiences.” NBER Working Paper No. 6800, National Bureau of Economic Research, November 1998; http://www.nber.org/papers/w6800.

Einzig, Paul. Leads and Lags: The Main Cause of Devaluation. London: MacMillan and Company, 1968.

Fox News. “Sens. Schumer, Graham Won’t Pursue Chinese Tariff Bill.” Fox News, September 28, 2006; http://www.foxnews.com/story/2006/09/28/sens-schumer-graham-wont-pursue-chinese-tariff-bill.html.

HSBC Global Research. “Emerging Markets Currency Guide 2016: An Essential Companion.” January 2016; http://bg.panlv.net/report/1e1692068457e0b7.html.

International Monetary Fund. Balance of Payments and International Investment Position Manual. Sixth Edition. Washington, DC: IMF, November 2013; http://www.imf.org/external/pubs/ft/bop/2007/bopman6.htm.

International Monetary Fund. Annual Report on Exchange Rate Arrangements and Exchange Restrictions 2014. Washington, DC: IMF, October 2014; https://www.imf.org/external/pubs/nft/2014/areaers/ar2014.pdf.

International Monetary Fund. “Statement by Ms. Christine Lagarde on IMF Review of SDR Basket of Currencies.” Press Release No. 15/513, November 13, 2015; http://www.imf.org/external/np/sec/pr/2015/pr15513.htm.

Leigh, Daniel; Lian, Weicheng; Poplawski-Ribiero, Marcos and Tsyrennikov, Viktor. “IMF Survey: Exchange Rates Still Matter for Trade.” World Economic Outlook, September 28, 2015; https://www.imf.org/en/News/Articles/2015/09/28/04/53/sores092815b.

Lopez, Linette. “There’s a Part of China’s Economy That’s Making Less Sense Every Day.” Business Insider, July 11, 2016; http://www.businessinsider.com/china-yuan-outflows-make-no-sense-2016-7.

Marston, Richard C. International Financial Integration: A Study of Interest Differentials between the Major Industrial Countries. New York: Cambridge University Press, 1995.

McCauley, Robern N. and Shu, C. “Dollars and Remnibi Flowed Out of China.” BIS Quarterly Review, March 6, 2016, pp. 26-27; https://www.bis.org/publ/qtrpdf/r_qt1603u.htm.

McKinnon, Ronald I. and Oates, Wallace E. “The Implications of International Economic Integration for Monetary, Fiscal and Exchange Rate Policies.” The International Finance Section, Princeton University, 1966.

Minton, Zanny. “Global Finance Survey: A Wealth of Blueprints.” Economist, January 30, 1999, pp. S5-S8.

Neely, Christopher J. “The Giant Sucking Sound: Did NAFTA Devour the Mexican Peso?” Federal Reserve Bank of St. Louis Review, July/August 1996, 78(5), pp. 33-48; https://files.stlouisfed.org/files/htdocs/publications/review/96/07/9607cn.pdf.

Neely, Christopher J. “An Introduction to Capital Controls.” Federal Reserve Bank of St. Louis Review, November/December 1999, 81(6), pp. 13-30; https://files.stlouisfed.org/files/htdocs/publications/review/99/11/9911cn.pdf.

Neely, Christopher J. “Unconventional Monetary Policy Had Large International Effects.” Journal of Banking and Finance, March 2015, 52, pp. 101-11.

Obstfeld, Maurice and Taylor, Alan M. “The Great Depression as a Watershed: International Capital Mobility Over the Long Run,” in Michael D. Bordo, Claudia D. Goldin, and Eugene N. White, eds., The Defining Moment: The Great Depression and the American Economy in the Twentieth Century. Chicago: University of Chicago Press, 1998, pp. 353-402.

People’s Bank of China. “Central Bank Instruments to Deal with the Crisis—From the Perspective of the People’s Bank of China,” in The Global Crisis And Financial Intermediation In Emerging Market Economies, BIS Papers No. 24. Basil: Bank for International Settlements, December 2010, pp. 131-32; http://www.bis.org/publ/bppdf/bispap54.pdf.

Spiegel, Mark M. “A Look at China’s New Exchange Rate Regime.” Federal Reserve Bank of San Francisco Economic Letter, No. 2005-23, September 9, 2005; http://www.frbsf.org/economic-research/publications/economic-letter/2005/september/a-look-at-china-new-exchange-rate-regime/.

Trading Economics. “China Government Debt to GDP.” 2016; http://www.tradingeconomics.com/china/government-debt-to-gdp.

Wen, Yi. “Making Sense of China’s Excessive Foreign Reserves.” Working Paper No. 2011-006A, Federal Reserve Bank of St. Louis, February 2011; https://research.stlouisfed.org/wp/more/2011-006.

Wen, Yi. “Explaining China’s Trade Imbalance Puzzle.” Working Paper No. 2011-018A, Federal Reserve Bank of St. Louis, August 2011; https://research.stlouisfed.org/wp/2011/2011-018.pdf.

Wigglesworth, Robin; Lewis, Leo and McCrum, Dan. “Central Banks: Negative Thinking.” Financial Times, February 17, 2016; https://www.ft.com/content/7333e92a-d4a2-11e5-829b-8564e7528e54.

Wildau, Gabriel. “China’s Large Forex Reserves Constitute Both a Blessing and a Curse.” Financial Times, September 29, 2014; https://www.ft.com/content/9dfa88ce-2ea1-11e4-afe4-00144feabdc0.

Wildau, Gabriel. “China Steps Up Capital Controls To Stem Outflows.” Financial Times, January 8, 2016a; https://www.ft.com/content/9e25a772-b5df-11e5-aad2-3e9865bc6644.

Wildau, Gabriel, “China Mouthpiece Warns Soros Against Shorting Renminbi.” Financial Times, January 26, 2016b; http://www.ft.com/intl/cms/s/0/ebabbebec40d11e5993ad18bf6826744.html#axzz46C17ktCF.

Xiao, Fengjuan and Kimball, Donald. “Effectiveness and Effects of China’s Capital Controls.” Conference: WTO, China, and the Asian Economies, IV: Economic Integration and Economic Development, University of International Business and Economics, Beijing, China, June 2006; https://faculty.washington.edu/karyiu/confer/beijing06/papers/xiao-kimball.pdf.

Zhang, Maggie. “China’s Foreign Investment ‘Shopping Spree’ Over as Beijing Moves To Slash Capital Outflow.” South China Morning Post, November 29, 2016; http://www.scmp.com/news/china/economy/article/2050029/chinas-foreign-investment-shopping-spree-over-beijing-moves-slash.


Refbacks

  • There are currently no refbacks.


Copyright (c) 2017 Christopher J. Neely

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.