China's Foreign Exchange Reserves and China Investment Corporation's Steps towards Diversifying How It Manages Its Portion of Them

Abstract

After overtaking Japan as the world's largest holder of foreign exchange reserves in February 2006, China saw its foreign exchange reserves grow to $2,131.6bn by end-June 2009. Currently some 70% of China's foreign exchange reserves are reported to be in US dollars, with most invested in US Treasuries. Chinese investors as a whole were also the largest holders of US Treasuries ($776.4bn) as of end-June 2009.

China's foreign exchange reserves are managed by the State Administration of Foreign Exchange (SAFE) - or rather, one of its departments, the Reserves Management Department. In 2009 SAFE announced that it would purchase bonds denominated in special drawing rights issued by the International Monetary Fund as part of its (i.e., SAFE's) plans to diversify how it invests China's foreign exchange reserves. SAFE also began to invest some of these reserves in overseas resource stocks and financial stocks in 2008.

China Investment Corporation (CIC), which was established in September 2007 with $200bn in capital to manage some of these assets, initially planned to invest one-third of its capital in overseas assets. However, CIC's annual report for fiscal 2008 reveals that this has since been increased to 50% in a major change in investment policy. After a trial period in 2007-08, CIC recommenced overseas investment in 2009, following internal changes and the recruitment of new staff.

As the Chinese government has not announced any changes to its plans to diversify how the country's foreign exchange reserves are invested, we expect it to continue to experiment on this front.

Keywords: Foreign Exchange Reserves, SAFE, CIC

JEL Classification: E58, E61, F31, G15, G18, G28