Indication of Change in China's Foreign Exchange Reserves Management: Mention of "Prudent Diversification"

[Asia Economy Beijing=Special Correspondent Park Sun-mi] China's foreign exchange authorities have hinted at changes in the management of foreign exchange reserves by mentioning the need for a 'cautious' diversification of foreign exchange reserves amid global risks this year.

According to the State Administration of Foreign Exchange (SAFE) on the 7th, the necessity of complementary management of foreign exchange reserves was mentioned during the discussion on key foreign exchange management tasks for 2020 held on the 5th. SAFE stated that one of this year's key foreign exchange management tasks is to "enhance the management of foreign exchange reserves with Chinese characteristics and raise the level of modernization in management. Through cautious diversification, we must safeguard the safety, liquidity, and value appreciation of foreign exchange reserve assets."

This is the first time that China's foreign exchange authorities have mentioned cautious diversification of foreign exchange reserve assets at their annual work meeting. The Hong Kong South China Morning Post (SCMP) noted that "China has hinted at a subtle policy shift in the management of foreign exchange reserves," recalling that the foreign exchange administration emphasized the prevention of risks from external shocks by mentioning global financial risks in its work report this year.

So far, China's $1.3 trillion foreign exchange reserve diversification strategy has only proceeded in the direction of reducing dependence on dollar-denominated assets. According to SAFE statistics, between 2014 and 2015, the proportion of dollar assets in China's foreign exchange reserves decreased from 79% to 58%. Considering that the dollar asset share of global foreign exchange reserves was 61.8% as of the end of the third quarter last year, China's dollar share is below the global average.

Once the world's largest holder of U.S. Treasury bonds, China was overtaken by Japan in June last year. China has reduced its U.S. Treasury holdings for four consecutive months until the end of October last year and currently holds $1.1016 trillion.

China has recently also attempted to reduce the U.S. dollar share and increase the euro share in its currency basket. The China Foreign Exchange Trade System (CFETS), under the People's Bank of China, lowered the U.S. dollar weight in the currency basket from 22.4% to 21.59% starting from the 1st of this month. Meanwhile, the euro share expanded from 16.34% to 17.40%.

Xie Dongming, an economist at OCBC Bank in Singapore, said, "China needs to reduce its U.S. Treasury holdings and diversify its foreign exchange reserve assets to have a more balanced portfolio." Ken Cheng Kit Tai, Asia foreign exchange strategist at Mizuho Bank, stated, "This adjustment reflects the People's Bank of China's intention to reduce the influence of the U.S. dollar on the yuan's value."

This content was produced with the assistance of AI translation services.