China’s Reserve Growth: Still Large, and Rather Volatile

China’s foreign exchange reserves reached over $1.9 trillion at the end of September, taking its stocks to almost twice that of Japan, the second largest holder of reserves and almost four times that of Russia ($540 billion)

This implies an increase of about $100 billion over the quarter or less than the reserve accumulation of the last two quarters.  More significantly, it is about the same as the combination of the trade surplus and FDI, indicating that hot money inflows may have been reduced or even reversed. However, on a monthly basis, the flows continue to be quite volatile, given some indication of the pressures Chinese macro policy makers are facing – and possibly suggesting that China could experience more outflows in the future.


Note – this graph replaces an old one which truncated the data set

Reserve watchers tend to scour the reserves data for indications of short-term inflows. As a rough gauge what’s left after subtracting out the inflows from China’s trade surplus and FDI (and interest payments and remittances) is thought to be hot money, though some analysts have warned against relying too heavily on this measure. While not all of such unexplained flows are necessarily hot money, some may have been the repatriation of Chinese assets, the unwinding of onshore fx swaps or RMB investment from Hong Kong, there were clearly ways money was finding its way into China and was being bought by the PBoC.   For a much more detailed analysis of the components of China’s capital account and reserves, see this state street analysis.  Rough estimates suggest these funds could have been as high as $150 billion in the first half of 2008 and that they could have reversed or stalled more recently as RMB appreciation expectations ebbed.

In Q3, record trade surpluses in August and September as import growth  slowed in price and volume terms took the Trade  surplus and FDI total to over $100 billion, or about the same as reserve growth… or was it?

China’s reserve growth might actually be higher than the raw figure indicates though.  Assuming that China has maintained a 70% dollar share, China’s reserve accumulation might have been in the neighbourhood of $150 billion for the quarter and as much as $70 billion in August alone. The dollar’s rally reduced the value of PBoC’s euro and pound holdings. Given that the PBoC likely holds around $500 billion in euros and pounds, a 10%+ swing in the currencies can have a major effect on the dollar value of its portfolio.

All of this suggests that China may still be attracting inflows, even if their pace has slowed from earlier this spring. Furthermore it suggests that China’s reserve accumulation patterns continue to be volatile.


As Michael Pettis and Brad Setser have pointed out more eloquently, policy measures including the requirement that state banks apply the increases in required reserves in dollars not in RMB, held down the headline reserve accumulation earlier this year. So too did transfers to the Chinese investment corporation.  This suggests then that the over $250 billion in reserve growth earlier this year was even higher. However, China stakes suggested that in the more recent reduction in required reserves, the PBoC returned funds in RMB in USD- thus one question is answered, it is the PBoC and not the state banks that bear the foreign exchange risk.

So if China’s reserves grew by $150 billion in Q3, this implies several things

Speculative inflows seem not to have reversed – China is still receiving inflows, though the trade surplus and FDI account for a greater share. It is possible China’s capital controls are doing a better job stopping the flows of capital. But so far it seems China has not suffered outflows.

Chinese attempts to channel money abroad have lapsed in the midst of the financial crisis.

China is still buying a lot of dollars, even as it increased its holdings of EU equities earlier this year. And with a wariness of taking on risk, much of this is likely in the treasury market, now that agencies are shunned.

However, hot money or unexplained flows do seem to be slowing. They were minimal in September, but August data suggested large inflows.

However, the recent data makes it clearer and clearer that China and Saudi Arabia are now basically the only EM governments adding to their foreign exchange reserves.  The foreign assets of the Saudi Arabian Monetary agency rose to $420 billion at the end of August, about $ 15 billion over the month and over $100 billion so far this year.  But overtime, Saudi Arabia’s asset growth will slow significantly if oil stays below $80 a barrel.

Other countries are now spending their reserves to support their currencies. China’s large reserve growth only barely offset the decline in reserves in the rest of Asia in the month of September as Korea, India, Hong Kong, Taiwan and others saw reserve levels fall. So too did Russia, whose reserves slipped from almost $600 billion in July to about $546 billion Oct 3.

However not all of this was spent, like China, others saw the value of their non dollar assets increased by the dollar’s rally. However, on net the trend has shifted away from the accumulation.  In 2007 and early in 2008, massive foreign exchange reserve accumulation and the large stocks of pre-existing holdings, led to the establishment and growth of many sovereign wealth funds or to central banks investing in more high yielding assets. While sovereign wealth funds still have a lot of money to invest, it may not be as much as some thought,  which puts discussion regarding the Santiago principles released on Saturday into context.

Over the last year, since sovereign wealth funds exploded on to the pages of the financial press, there has been a process of familiarization with many of the funds, helped by detailed press coverage, an increase in analysis and research (including many many words on this website) willingness of many funds to meet with key officials and to channel material to the press. While the Santiago principles don’t remove all concerns, they do set a series of (albeit voluntary) regulations with which most funds will come up with ways to meet.

in fact, many sovereign funds are investing more at home

Countries that have deployed or plan to deploy sovereign wealth fund assets to support domestic asset markets or banks to improve sentiment. Doing so not only is an attempt to cushion economies but it may also accelerate

Kuwait:  KIA has increased its allocation to the domestic market.

Russia: So Far Russia seems to have avoided use of its sovereign funds in its pledged $200 billion liquidity provision and bank backstopping plan, perhaps fearing the effects on its sovereign rating if it did so. A portion of its reserves will be spent to stand in for Russian banks and corporate external debt though.

Qatar: The Qatar investment Authority  agreed to contribute 10-20% of Qatari banks capital base (on Sunday’s prices) to insure funding for development projects. Many GCC countries including Qatar have faced increasing project finance costs even before the global money markets froze.

Stakes in the Qatari state banks were transferred to the QIA some months ago.

UAE: While Neither ADIA or the Abu Dhabi investment Council which holds stakes in local banks and other institutions and MENA equities, are confirmed to have made purchases, the Central banks liquidity facility is thought to be a transfer of funds from Abu Dhabi to Dubai’s cash strapped banks. However, the capital provided is still costly and little has been taken.

Kazakhstan will use part of its $26 billion stabilization fund to create a state fund to offset the costs of the crisis and slowing growth. The country plans to create a national well-being fund that will subsume its two state holding companies, Kazyna and Samruk, which had been intended as Temasek like vehicles to improve the performance of State owned enterprises. Around $10 billion would come from the stabilization fund

China:  China’s CIC reportedly bought stakes in the big three banks in which it is already the largest shareholder. This contributed to one of the short-lived surges in Chinese equity markets in September. CIC has yet to deploy most of its capital, and Bloomberg suggested, the CIC may have had funds in the now-frozen Reserve Primary Fund

Taiwan has used its stabilization fund to purchase shares.

Hong Kong authorities suggested a share of Hong Kong’s $180 billion in foreign exchange reserves might be used to stabilize domestic markets. The HKMA also did so during the Asian financial crisis as a means to defend the HKD’s peg to the dollar. Hong Kong equities made up around 5% of the Hong Kong Exchange Fund’s assets earlier this year

Related RGE content


Chinese Reserves Now Growing at A Slower Pace than in H1: Hot Money Reversal?

Sovereign Funds Trying to Stabilize Domestic, Not Foreign Asset Markets?

Central Banks Reserves Diversification: Shifting Away from the Dollar? 

3 Responses to "China’s Reserve Growth: Still Large, and Rather Volatile"

  1. bsetser   October 15, 2008 at 7:42 am

    Rachel — the graph showing total reserves looks off — does seem to go to $1.9 trillion

  2. Rachel   October 15, 2008 at 8:33 am

    Thanks Brad! I’d like to blame the new excel, but I think it was just my absentmindedness.

  3. Guest   October 15, 2008 at 10:50 am

    Another big blowup for China CIC investment in US money market fund default 13 (Bloomberg) — China Investment Corp., the sovereign wealth fund that bought stakes in Morgan Stanley and Blackstone Group LP before their stocks plunged, may have as much as $5.4 billion frozen in a U.S. money-market account.Stable Investment Corp., an affiliate of Beijing-based CIC, was the largest shareholder in Reserve Primary Fund on Sept. 1, according to regulatory filings. Reserve Primary suspended withdrawals last month after becoming the first U.S. money- market fund in 14 years to leave investors with losses. Stable Investment had about $6 billion in additional U.S. money-market funds earlier this year.