China | Estimating the optimal level of the country's foreign reserves

Summary

We estimate China’s optimal foreign reserve level is around USD 2,769.3 billion, USD 454.5 billion lower than the current level. That means, there is still some buffer to reduce the reserve amid risks of western potential sanctions.

Key points

• Key points:
• This note is dedicated to estimating China’s optimal level of foreign reserves based on a number of extant researches.
• As the tension between China and Western countries continues to rise since the China-US trade war in 2018, authorities are well aware of the risk that Western countries might apply similar financial sanctions to China.
• We construct our own framework on gauging China’s optimal level of foreign reserve based on the theoretical measures provided by Bank for International Settlements stated above and link it to China’s macroeconomic data.
• Diversifying foreign reserves asset allocation and reducing dependence on USD-denominated assets is a also must.

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