China pledges ‘prudence’ in diversifying its foreign exchange reserves in 2020 as global risks rise

China will carefully push ahead with diversification of its US$3.1 trillion foreign exchange reserve holdings, says the State Administration of Foreign Exchange

The regulator says it will improve its management of reserves ‘with Chinese characteristics’, but has not elaborated on what that means

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China last week cut the weighting of the US dollar in a basket of foreign currencies used to determine the strength of the yuan. Photo: Reuters

Published: 8:10pm, 6 Jan 2020Updated: 11:26pm, 6 Jan 2020

China will “steadily and prudently” diversify its US$3.1 trillion foreign exchange reserve holdings, the government agency managing the assets pledged in its 2020 work plan, suggesting a subtle policy change in the way Beijing uses its hard currency holdings.

The careful approach would “promote the diversified use ... and ensure the safety, flow, and preservation and appreciation of foreign exchange reserve assets,” China’s State Administration of Foreign Exchange (SAFE) said in a statement published on Sunday, which summarised the results of its annual work conference last week.

It is the first time that SAFE, headed by Pan Gongsheng, deputy governor of the People’s Bank of China, has called for “prudence” in diversifying China’s reserve assets in its annual work conference statement. The regulator also vowed to improve its management of reserves “with Chinese characteristics”, although it did not explain what that meant.

SAFE added it would prevent risks caused by external shocks endangering “national economic and financial security” in 2020.

China’s diversification strategy for its foreign exchange reserves - which generally indicates a reduction in holdings of US government bonds for other riskier assets - has gained speed in the past decade after the creation of a separate sovereign wealth fund in 2007. SAFE has created a special office of lending dollars to institutions like the China Development Bank to finance overseas projects and launched a number of overseas offices for investment.

In its 2018 annual report, SAFE revealed for the first time the share of US dollar denominated assets in its reserves portfolio for the period 2005 to 2014. Dollar assets accounted for 58 per cent of China’s total reserves by 2014 - the most recent data provided - down from 79 per cent in 2005, the report showed.

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