USCC Economic Issue Brief China s FX Reserves and Treasury Holdings
USCC Economic Issue Brief
No. 2 | March 21, 2014
China’s Foreign Exchange Reserves and
Holdings of U.S. Securities
Nargiza Salidjanova, Policy Analyst
Persistent intervention in the exchange rate markets to keep the RMB undervalued has allowed China to accumulate the world’s largest reserves of foreign exchange, most of which is in U.S. dollars. By yearend 2013, China had over $3.82 trillion in foreign exchange reserves, nearly double the figure five years earlier. A significant proportion of these reserves is invested in U.S. Treasury securities because Treasuries are seen as a safe investment; are denominated in dollars; and constitute the only financial market base vast enough to accommodate
China’s surplus liquidity. To date, because China continues to undervalue its currency (and therefore must purchase U.S. dollars), China’s efforts to reduce its dependence on U.S. securities necessarily have been modest.
U.S. Securities
As China’s foreign exchange reserves have risen, so have its holdings of U.S. securities. U.S. Treasury securities, which allow the federal government to finance its budget deficit, are the largest category of
U.S. securities held by China.* As indicated in figure
1, China’s official holdings of U.S. Treasury securities have been growing exponentially to reach $1.3 trillion as of December 2013, making China the largest foreign holder of U.S. Treasury securities † (it overtook Japan as the largest holder in 2008).1
Key Points
China pursues an exchange rate policy that keeps its currency undervalued. This requires China’s central bank to purchase U.S. dollars entering China’s economy, resulting in massive foreign exchange reserves ($3.82 trillion by the end of 2013).
A significant portion, $1.3 trillion as of December 2013, of China’s foreign exchange reserves was invested in U.S. Treasury securities.
Official data does not fully account for China’s holdings of U.S. securities due to constrained data availability and significant time
No. 2 | March 21, 2014
China’s Foreign Exchange Reserves and
Holdings of U.S. Securities
Nargiza Salidjanova, Policy Analyst
Persistent intervention in the exchange rate markets to keep the RMB undervalued has allowed China to accumulate the world’s largest reserves of foreign exchange, most of which is in U.S. dollars. By yearend 2013, China had over $3.82 trillion in foreign exchange reserves, nearly double the figure five years earlier. A significant proportion of these reserves is invested in U.S. Treasury securities because Treasuries are seen as a safe investment; are denominated in dollars; and constitute the only financial market base vast enough to accommodate
China’s surplus liquidity. To date, because China continues to undervalue its currency (and therefore must purchase U.S. dollars), China’s efforts to reduce its dependence on U.S. securities necessarily have been modest.
U.S. Securities
As China’s foreign exchange reserves have risen, so have its holdings of U.S. securities. U.S. Treasury securities, which allow the federal government to finance its budget deficit, are the largest category of
U.S. securities held by China.* As indicated in figure
1, China’s official holdings of U.S. Treasury securities have been growing exponentially to reach $1.3 trillion as of December 2013, making China the largest foreign holder of U.S. Treasury securities † (it overtook Japan as the largest holder in 2008).1
Key Points
China pursues an exchange rate policy that keeps its currency undervalued. This requires China’s central bank to purchase U.S. dollars entering China’s economy, resulting in massive foreign exchange reserves ($3.82 trillion by the end of 2013).
A significant portion, $1.3 trillion as of December 2013, of China’s foreign exchange reserves was invested in U.S. Treasury securities.
Official data does not fully account for China’s holdings of U.S. securities due to constrained data availability and significant time