A report issued by Renmin University’s International Monetary Institute argues against maintaining large foreign exchange reserves, mainly U.S. Treasuries, as the yuan adoption and trust grow. The document advises holding “moderately ample” levels of foreign reserves, with dollar bonds being their largest component.
Report: China Should Reduce Forex Reserves As Yuan MaturesChina’s level of foreign reserves, one of the largest in the world, and its ownership of U.S. Treasuries, are under scrutiny by the country’s leading economic institutions.
“For the yuan’s internationalization, maintaining moderately ample forex reserves can support the currency. That said, a gradual reduction will be inevitable, once the yuan matures and becomes more adopted globally as a medium of settlement and storage of value, supported by a large circulation abroad,” the report states.
The report suggests that an optimal level of foreign reserves should reach 11.49% of China’s gross domestic product (GDP), and that maintaining a larger level would hinder the country’s economy and the yuan’s growth.
“Since a substantial portion of China’s reserves is foreign government bonds, this means low yields and depreciation risks should an issuing country’s currency weaken,” it argues.
While China has reduced its U.S. Treasury holdings, they still constitute the largest component of its foreign reserves.
In February, the Communist Party of China (CCP) journal published an article citing President Xi’s statements pointing out that the nation needed a powerful currency that can be “widely used in international trade, investment and foreign exchange markets, and attain reserve currency status.”
China has also allowed the yuan to revalue against the dollar, even if it has recently been losing ground because of the ongoing geopolitical events.
