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Although the size of foreign exchange reserves decreased by US$18.7 billion from the end of the previous month, the central bank still held the world's largest foreign exchange reserves of US$3,219.3 billion in January 2024. We are more than 3Where did the $2 trillion in foreign exchange reserves go? Is the central bank's U.S. bonds China's U.S. dollar reserves or U.S. dollar assets? Has there been a significant change in China's holdings of US dollar assets in its foreign exchange reserves? Should China's foreign exchange reserves expand or shrink?
1. Although the size of foreign exchange reserves decreased by US$18.7 billion from the end of last month, the central bank still had the world's largest foreign exchange reserves of US$3,219.3 billion in January 2024.
Since the beginning of 2023, due to the economic recovery after the end of the new crown epidemic prevention and control is not as expected, coupled with the continuous interest rate hikes in Europe and the United States in the first three quarters of last year, the geopolitical tensions have intensified, the real estate market has been sluggish for a long time, and the pressure from continued low inflation to deflation has increased, and the RMB exchange rate has been under continuous pressure with the strong and powerful regulatory measures of the central bank.
Over the years, the central bank has built up a sizable pool of war money to defend the renminbi, including about $3 trillion in foreign exchange reserves.
But some argue that China needs to reduce the size of its foreign exchange reserves, while others argue that it is still important to have large foreign exchange reserves.
On February 7, before the Spring Festival, the latest data released by the State Administration of Foreign Exchange showed that as of the end of January 2024, the scale of China's foreign exchange reserves decreased by US$18.7 billion from the end of the previous month to US$3,219.3 billion, a month-on-month decrease of 058%, but an increase of 11%。
The State Administration of Foreign Exchange also explained in the announcement that the decline in the scale of foreign exchange reserves that month was the result of a combination of factors such as exchange rate conversion and asset changes.
With $3,219.3 billion in foreign exchange reserves, China has the largest foreign exchange reserves in the world.
Second, we are more than 3Where did the $2 trillion in foreign exchange reserves go?
According to the State Administration of Foreign Exchange, when announcing the size of foreign exchange reserves, it never disclosed that the central bank would exceed 3Where are the world's largest foreign exchange reserves of $2 trillion invested?
But in general, judging from some of the data that has been disclosed, at least we can know that one is investing in more and more **, and the other is investing in less and less but probably the largest proportion of U.S. Treasury bonds.
The central bank has increased its holdings for 15 consecutive months** starting in November 2022.
China's foreign exchange reserves fell slightly in January 2024, but continued to increase their holdings by 320,000 ounces in the month. Since November 2022, China's ** reserves have increased from 63.67 million ounces to about 19.48 million31 tons, an increase to 73.05 million ounces in January 2024 about 2,235 ounces39 tons, an increase of 147%。Converted to US dollars, it is from 1116 in November 2022500 million US dollars, increased to 1502$1.5 billion, an increase of 34.45%。The increase in US dollar terms is higher than the increase in reserves in volume terms because it includes the change factor.
According to the Spot at the end of November 2022, it was 1752 per ounce, according to the World Association$7, 2053 at the end of January 2023$25, 15 months for ** 171%。* The number grew by 147% with a growth of 17As a result of 1%, the amount of ** reserves denominated in US dollars increased by exactly 345%。
It can be calculated that the proportion of ** reserves in the central bank's foreign exchange reserves in January 2024 is 467%, up from 358% increased by 109 percentage points.
However, it is important to note that historically, ** has been highly correlated with risk aversion. The Russia-Ukraine war in February 2022 and the Israeli-Kazakhstan war in October 2023 have pushed up the war After the war factor subsides, it will naturally adjust downward.
The central bank has increased its holdings of U.S. bonds at times, and at other times has increased its holdings of U.S. bonds, but the general trend has been since 2015, and it has been significantly more U.S. bonds.
But China, along with Japan, has historically been the top foreign holder of U.S. Treasuries, according to monthly data released by the U.S. Treasury Department on all foreign debt holders.
China held $782 billion in U.S. Treasury bonds in November 2023, up 1. from October, according to the latest data from the U.S. Treasury6%, which is still the second largest holder of foreign Treasury bonds in the United States after Japan. However, it is a significant decrease of 276%。This asset also accounted for 34 percent of the PBOC's foreign exchange reserves in November 20227% slipped to 243%。15 months down 104 percentage points.
3. Are the central bank's U.S. bonds China's U.S. dollar reserves or U.S. dollar assets?
However, it would be a mistake to equate a reduction in China's holdings of U.S. bonds or U.S. dollar reserves.
This is because, in addition to the PBOC's foreign exchange reserves, the US Treasury data includes debt held by institutional and private investors from China. As a result, only a portion of this data is purchased by the PBOC's foreign exchange reserves. But what the proportion, no one knows.
American economist Brad WIn his 2018 book, Following Money and Asia's Challenges to the Global Economy, Setser has a dedicated chapter on China's holdings of U.S. bonds. He argues that the central bank's foreign exchange reserves are practically incomplete due to a separate item on the People's Bank of China's balance sheet, "other foreign assets" and a special item in the international investment position, "other, other, assets". On the one hand, the U.S. Treasury Department announced that some of China's treasury bond holdings are held by corporations and individuals, and on the other hand, China's State Administration of Foreign Exchange has always had a significant institutional investment portfolio and a sizable U.S. ** account book. This shows that the dollar reserves in the People's Bank of China's foreign exchange reserves are not equivalent to China's holdings of US Treasury bonds.
At the same time, in fact, as of November 2023, Chinese investors were net buyers of U.S. corporate bonds and net purchases of U.S.**.
The U.S. has outperformed in 2023, with the S&P 500 trading 243%。
U.S. bonds and ** agency bonds held by Chinese institutions increased to 1. at the end of November due to rising valuations04 trillion US dollars, corporate bond holdings increased to 19 billion US dollars, and US stock holdings increased to 307.5 billion US dollars.
This means that Chinese investors, including the People's Bank of China, corporations and individuals, held $1,366.7 billion in U.S.** assets at the end of November 2023.
4. Has there been a significant change in China's foreign exchange reserve portfolio in terms of holdings of US dollar assets?
In recent years, the size of China's foreign exchange reserves has been hovering around US$3 trillion, and the foreign exchange reserves in January 2024 have been 3.3 percent higher than in 2014The peak of $84 trillion decreased by 161%。
At the same time, China's holdings of U.S. Treasuries began to decline after peaking at $1,316.7 billion in October 2013. Compared with 10 years ago, China's holdings of U.S. debt have decreased by 406%, and the proportion of the portfolio in foreign exchange reserves decreased by 102 percentage points.
In 2015, the People's Bank of China (PBOC) contributed to expectations of a one-time depreciation of the renminbi by 2%, with an estimated $1 trillion in foreign exchange reserves used to defend the renminbi at the time.
In the second half of 2023, there was speculation that SAFE might use its dollar reserves to defend the yuan, and the volatility of the yuan widened sharply as the US-China interest rate differential reached an all-time high following a series of Fed rate hikes.
The Fed's monetary tightening cycle of raising interest rates and shrinking its balance sheet in March 2022 coincided with the monetary expansion cycle of the People's Bank of China's (PBOC) RRR and interest rate cuts in November 2021. In 2023, the renminbi will depreciate against the US dollar by as much as 95% 。
The deterioration in relations between China and the United States has also raised concerns about Chinese investors' exposure to US dollar assets.
However, Brad Setser, a senior fellow at the Council on Foreign Relations, believes that China's data does not indicate that the yuan will come under increasing pressure between July and September 2023, and that China will use its dollar reserves heavily.
In an October blog post, Seser said that "the only interesting change in China's foreign exchange reserves over the past six years has been the shift to institutions." He refers to agency bonds issued by U.S. federal departments or corporations that are funded by **.
This has led to a small reduction in China's holdings of U.S. Treasuries, but it also suggests that it would be a mistake to equate a reduction in China's holdings of U.S. bonds or a share of U.S. dollar reserves.
5. Should China's foreign exchange reserves expand or shrink?
Over the past few years, the size of China's foreign exchange reserves has been a topic of debate among the financial community and Chinese netizens.
* There is an increasing emphasis on increasing domestic demand and self-reliance, although we have yet to find a new growth engine to replace exports amid high local** debt levels and a prolonged downturn in the real estate market.
Yu Yongding, a prominent economist and former central bank adviser, has long advocated an "orderly" reduction in China's investment in U.S. Treasuries, saying that the size of foreign exchange reserves should be reduced, that China should move away from a model of relying on exports to drive economic growth, and that it should also be a measure to guard against the possibility of a deterioration of U.S. overseas debt.
However, Wang Yongli, former deputy governor of the Bank of China, pointed out in the article "Basic Issues of Foreign Exchange Reserves that Need to Be Accurately Grasped" published on the Economic Observer on May 28, 2022, that some people accuse the central bank of having too many foreign exchange reserves, which not only makes the RMB base currency supply more dependent on foreign exchange reserves such as the US dollar, but also easily loses monetary policy autonomy and causes the ...... of currency over-issuanceThere is also a huge risk that relations with the United States and its allies will be frozen or confiscated if they break down.
As a result, there have been calls for the need to reduce foreign exchange reserves to 1 as soon as possibleWithin 5 trillion US dollars, in particular, it is necessary to quickly sell the US bonds held, to get back the US dollar reserves, or to buy a large number of ** to be shipped back to China, or to invest in a large number of friendly countries along the Belt and Road or to help them repay foreign debts, or to buy a large number of oil and gas, minerals, grain and other strategic materials to be shipped back to the country for storage, etc., but also to learn from the practice of Russia's export of natural gas ruble settlement order, the introduction of China's commodity export RMB settlement order, requiring China's exports to be settled in RMB, to accelerate the internationalization of RMB, Reduction of new foreign exchange reserves.
Wang Yongli believes that the above-mentioned statements have had a wide impact on society and have been respected by many people, but these statements ignore the historical background of the formation of the central bank's huge foreign exchange reserves, the internal logic of the selection of foreign exchange reserves and the internal logic of the currency issuing country, the strict conditions for a country's currency to become an international currency, and the market conditions required for the large-scale compression of foreign exchange reserves.
Wang Yongli emphasized that foreign exchange reserves are an important external liquidity buffer, especially for emerging markets. Therefore, there is no way to determine the "reasonable" size of a country's foreign exchange reserves. Foreign exchange reserves should be determined on the basis of actual conditions.
San Lang believes that Wang Yongli's understanding of foreign exchange reserves is undoubtedly relatively accurate. As a country that is still heavily dependent on imports, it is not easy to change the economic structure with the world's largest manufacturing capacity in a short period of time, especially since we have a service deficit of about 170 billion US dollars per year, and China's foreign direct investment stock has 382 trillion US dollars, 2. China imports 2$56 trillion. These must be supported by supporting foreign exchange reserves.
Although in terms of the size of foreign exchange reserves, bigger is not always better. But it is still important for China to have a sizable size of foreign exchange reserves to match the import of goods, services, and foreign investment, because the renminbi is not yet an international reserve currency, and the economy cannot yet get rid of its dependence on external demand.
When talking about foreign exchange reserves, we need to be clear that foreign exchange reserves are an important external liquidity buffer, especially for emerging markets. They can significantly reduce the risk of currency crises and are the ballast stone of financial stability.
Author: Xu Sanlang].