Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

Print Print Cite Cite
Style: MLA APA Chicago Close


It is nice to occasionally be right! China confirms it holds around 70% of its reserves in dollars

by Brad Setser
August 25, 2006

According to Market News International and others, the People's Daily has indicated that:

"About 70 pct of China's reserves are held in US dollars, confirming widespread speculation about the weighting."

That was rather obvious the moment the US released its survey data showing that China held around $525b in US securities at the end of June 2005.   A 70% ratio now implies that China probably has around $700b in US securities.  That is real money — as is the roughly $150-200b in US securities China has to buy every year to keep its dollar holdings at 70% of its (rapidly growing) reserves.  

Any one care to guess how large an impact that has on US interest rates?   (My estimates are in my testimony)

China's new (marginal) transparency probably isn't good news for professional Chinese reserve watchers though.  The mystery is gone. 

But China's disclosure does throw into question (I think) the work of all China analysts who use don't adjust for valuation and still use reserve growth to derive estimates of hot money flows.   With $300b or so in non-dollar reserves, 2-3% moves in the euro/dollar or pound/ dollar and the like can generate substantial monthly variation in China's headline reserve total.


  • Posted by Emmanuel

    It probably doesn’t matter anyway, but is this 70% of Chinese reserves denominated in USD mirrored by the currency’s weighing in the yuan basket? The guv’nor of the PBoC comments that its weighing is actually less than half.

    Just a thought.

  • Posted by bsetser

    empirically, I think the dollar weighting in the basket is higher .. at least if you try to back the weights out. Of course, China can fudge it a bit by including the HK $ (effectively in the US $ weight) in its basket, so the implied weight is influenced by the fact some other components of the basket move together with the $.

    But it also seems pretty clear that China doesn’t really have a basket. Its currency regime looks like dollar peg with a crawl, with the rate of crawl a function of Chinese internal politics. At least that is my read of the RMB’s movements v. the $.

  • Posted by Joseph Wang

    Just a cautionary note, just because something in published in the People’s Daily doesn’t mean that the reporter has any inside information. In order to find out what a story “means” you have to see it in context, and the trouble with Western reports of Chinese reports is that they strip out all of the information that would let you see if the report actually means anything or not. (For example, it makes a big difference on what page the article was at, if it was labelled an editorial or a commentary, if the reporter was named or not, if it was on the same day as another report in Xinhua, etc. etc. etc.)

  • Posted by Joseph Wang

    I was able to track down the original story (take the a name mentioned in the article, find the chinese characters, and then search in the people’s daily website).

    It’s a standard economic piece, and the reporter explicit *does not* have any inside knowledge of Chinese reserve holdings. In the second paragraph, he or she says that Chinese reserve holdings is *probably* around 70% based on public data on Chinese reserve purchases and on how the value of the reserve fluctuates in response to currency changes.

    Also the economists mentioned in the article are your standard “talking head” academics. There is nothing in a google search that suggests that any of them have any particular inside knowledge or influence in the PRC government.

  • Posted by jye

    After reading the original story, I agree with Joseph, the reporter is also guessing.

    And I have a question for you Joseph. A few months ago, you predicted that the trade surplus of China would disappear about now. Apparently it doesn’t come true. I am wondering what is your reasoning behind that bold prediction.

  • Posted by Joseph Wang

    The reasoning (which was incorrect) was that as China went along in its economic cycle imports would rise and catch up with exports. That hasn’t happened, which is one of the reasons I’m much more favorably inclined to an RMB appreciation that I was six months ago.

  • Posted by HK

    Brad and Joseph–This time I tend to agree with Joseph; currency composition of foreign exchange reserves is a top secret in any country, and such a casual Chinese news report without reference to any definite statement is liable to be misinformation. (However, I myself think 70% may not be much off the mark.)

  • Posted by bsetser

    The currency composition of a country’s fx reserves isn’t always a secret; Ted Truman has noted that many countries disclose the currency composition of their reserves. The ECB has disclosed the currency composition of its reserves, as has the US. China obviously is a bit different.

    Joseph — thanks for looking into this. I’ll take your word that the report isn’t to be trusted. I do think it is more or less correct … in part because it matches the numbers that have emerged from my own work!

  • Posted by Joseph Wang

    One thing that you have to be careful about is the “echo chamber” effect. Looking at the article, I wouldn’t be surprised if the reporter got the 70% figure from a paper that you wrote.

  • Posted by DOR

    It is indeed impressive to see the accuracy of the 70% story dissected and discussed so well. It reminds me of an analysis I wrote in the mid-1980s that was quoted (stolen) in another analyst’s report. When I asked about his sources, he turned very mysterious. It turns out, he got it anonymously and didn’t even know that I had written it.

    As per Joseph Wang, watch out for Xinhua quoting “western economists” with comments taken verbatim – and often out of context — from this blog.


  • Posted by HK

    Brad–The ECB has discloed its own reserves, which were transfered from 12 European national central banks. But as far as I know, the European centarl banks transfered only a small part of their foreign exchange reserves to the ECB. For the US, as the key currency country, foreign exchange reserves are any way minor, apart from its huge gold holdings.

  • Posted by Guest


    AFAIK, Russia and India discloses its currency composition.