China's Foreign Exchange Reserves: Balancing Consumption with Investments in Treasury Bonds and Sovereign Funds

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Abstract/Contents

Abstract: Economists have long been curious about China’s conservatism with regard to managing its foreign exchange reserves, which exceeded the $2 trillion mark in early 2009. Usually, having more funds means that one can afford to take more risk, but China has managed its huge foreign exchange reserves cautiously, hoarding much of its reserves in relatively safe, but low-yield Treasury bonds, while investing only a small fraction into sovereign wealth funds, whose expected returns are more promising, but riskier. This has led many economists to conclude that China has managed its reserves sub-optimally. But by conducting simulations, I quantify the nature of China’s dual challenge of achieving decent investment returns while maintaining optimal consumption levels. These simulations are based on previous analyses of university endowments, which share some key similarities with China’s foreign exchange reserves. The results suggest that China may be vulnerable to short-term and long-term negative shocks to its foreign exchange reserves. In the end, I conclude that owing to its need to minimize risk, China’s conservative approach to managing its reserves, although counterintuitive to many economists, is fundamentally rational.

Type of resource	text
Date created	June 2009

Author	Seck, Christopher Mun-Yin
Primary advisor	Shoven, John
Degree granting institution	Stanford University, Department of Economics

Subject	Stanford Department of Economics
Subject	asset allocation
Subject	consumption
Subject	foreign exchange reserves
Subject	optimization
Subject	sovereign wealth funds
Genre	Thesis

Location	https://purl.stanford.edu/gq459xn5960

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Preferred Citation: Seck, Christopher Mun-Yin. (2009). China's Foreign Exchange Reserves: Balancing Consumption with Investments in Treasury Bonds and Sovereign Funds. Stanford Digital Repository. Available at: https://purl.stanford.edu/gq459xn5960

Stanford University, Department of Economics, Honors Theses

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