With questions mounting about the health of China’s banking system, one figure in the spotlight is the adequacy of China’s foreign currency reserves. Since the government owns nearly all the banks, the Chinese government is essentially on the hook for the debts of the entire banking system. As a result, China’s official reserves are a hedge not only for country’s currency, but for its entire financial system.
China has long been the world’s currency hoarding champion, consistently holding more than $3 trillion in reserves since 2010 (the latest figure is $3.133 trillion). That may sound like a lot of money, and it is. But in comparison to China’s enormous economy, that’s now less than 30% of GDP.
China’s reserve position declined from 47.6% of GDP in 2010 to just 28.7% in 2017. Ironically, most of that decline is a symptom of China’s economic success. China has actually increased its reserves by 18% in U.S. dollar terms since 2010, but China’s nominal GDP has nearly doubled during the same period.
Currency reserves of China, Japan, and India as a percentage of GDP, 2007-2017 (IMF data).
Currency reserves of China, Japan, and India as a percentage of GDP, 2007-2017 (IMF data).Salvatore Babones
What do the reserves cover?
Under ordinary circumstances, currency reserves on the order of 25-30% of GDP would be enough to meet any contingency. When the Asian financial crisis hit South Korea in 1997, its reserves were just 3.7% of GDP. Unlike South Korea, China is at no risk of running out of reserves.