China’s Foreign Exchange Reserves

Ambassador (retd.) Kishan S RanaHonorary Fellow, Institute of Chinese Studies.

China’s foreign exchange reserves used to be $5 trillion, some three years back. Now they are down to $3.22 trillion. This has been the result of financial challenges that it has faced, including efforts to protect the value of the Yuan. The reserves are still huge, say 9 times larger than India’s $350 billion. But some may wonder if this is proof of economic decline.

Some comments are offered here, to provoke discussion.

  • The figure of $3.22 trillion does not include funds allocated in 2015 to the Asia Infrastructure Investment bank ($50 billion), and possibly to other investment vehicles, be it the OBOR fund or its components such as the China-Pakistan Economic Corridor.
  • In the past five years China’s outflow of ‘Overseas Direct Investment’ (ODI) has risen dramatically to over $100 billion per year. These are investments by Chinese companies buying up companies in the West, and part-acquisition of other foreign companies (a few in India such as Alibaba in e-retailers, and others), as also investments in Africa, Latin America and elsewhere. These monies will yield revenues, adding also to China’s global economic connections.
  • We know little of China’s sovereign wealth funds. It is possible that such allocations, size unknown, have also meant a drawdown on reserves.

Notwithstanding the above, the decline is dramatic and will surely produce some rethinking. We saw a glimpse of this in a comment by a leading Chinese academic that the country need not devote so much money to foreign aid – where its promised disbursements have outstripped those of the World Bank. See: Yuan Xuetong:  http://www.nytimes.com/2016/02/10/world/asia/china-foreign-policy-yan-xuetong.html?_r=0

Another likely outcome may be a greater insistence on profitability from all its OBOR related investments. All in all, we may expect further evolution in China’s foreign economic policy.

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