BOFIT Viikkokatsaus / BOFIT Weekly 2019/31

In its just-released annual report for 2018, China’s State Administration of Foreign Exchange (SAFE) said the dollar component of its currency holdings declined from 79 % in 1995 to 58 % at the end of 2014. From 2005 to 2014, the yield on China’s forex holdings averaged 3.7 % p.a. SAFE did not reveal the share of other currencies in its forex reserves nor more up-to-date information.

The composition of China’s forex reserves has traditionally been a closely guarded secret. The Caixin Global online financial magazine reports that China’s forex reserves are likely composed of over 30 currencies, a broader holding assortment than in most countries. The IMF estimates that the dollar presently accounts on average for about 62 % of forex holdings of all central banks.

China’s large current account surpluses in earlier years helped grow China’s forex reserves into the largest reserves in the world. China’s currency reserves peaked at 4 trillion dollars in mid-2014, only to decline rapidly until late 2016 when they levelled off at their current level. At the end of June 2019, China’s currency reserves amounted to roughly 3.2 trillion dollars, which was still nearly 2.5 times larger than Japan’s currency reserves (the second-largest reserves in the world). China’s current account surplus has fallen to around 1 % of GDP, so it no longer fuels growth of China’s reserves as it once did.