Foreign Exchange Reserves of The People's Republic of China - Composition

Composition

The composition of foreign exchange reserves is presently regarded as a state secret in the People's Republic of China. All financial records pertaining to the foreign exchange reserve have been poorly documented. The official sources elaborate that US dollar holdings make up 60% of the reserve, and that a fifth (up to 400 billion USD) of the reserve is held in Fannie Mae and Freddie Mac bonds. As of June 2008, the PRC held USD 447.5 billion of US agency bonds. The reports from the Bank for International Settlements, released by Reuters, reported that the US currency represents most of the settlements of China’s international trade. An unofficial spokesperson considered that the US dollar asset accounts represent 70% of the reserve, as the Japanese yen takes up about a 10% portion, while the Euro and the British pound occupy the rest.

There are some historical and international finance reasons lying behind this composition:

• First off, the bond issuer’s economy should be domestic primarily. Even though US transaction make up a large proportion in international trade, compared with its huge domestic GDP, it is still a small part of the global trade. Measured with other countries, US trade is not as high as that of Japan, Germany and Switzerland respectively. Those latter countries rely heavily on international trade, thus their currency value easily fluctuates in gross proportion along with the international flow of capital. This phenomenon poses a disadvantage to their values; moreover, unlike the US, the central banks of Japan, Germany and Switzerland reject the US currency and adopt their own currencies therefore taking a larger role in international financial markets.
• Secondly, historically the US Dollar has been used as means of payment, an intermediary of transactions, and a means of valuation in treasury. Two thirds of international trade is settled by the US dollar. Moreover, wholesales in international financial markets, banks, open markets and operations are mainly conducted in US dollars. The US dollar in assets are also the main foreign exchange reserve for big countries. Finally, international syndicated loan and international bonds trading are nearly wholly traded in US dollars or US bonds.