China’s foreign exchange reserves have been remarkably stable. Puzzled economists wonder why

China’s foreign exchange reserves have shown surprisingly little change in recent years despite volatile economic conditions and exchange rates among its major trading partners.

China’s reserve assets held in foreign currencies, the world’s largest war chest, have been stuck between US$3 trillion and US$3.2 trillion since 2017 because the People’s Bank of China (PBOC) appears to have largely stopped using them in market intervention to manage the yuan’s value.

“We will continue to refrain from routine intervention in the foreign exchange market and let market supply and demand determine the exchange rate level,” the official Xinhua news service said last week. “Efforts are being made to create conditions for the steady realisation of a ‘clean floating’ RMB exchange rate.”

Economists have been left pondering several puzzling questions: Why is the yuan not rising more sharply on strong buying demand as China’s economy snaps back from the coronavirus pandemic and foreign investors buy mainland securities to take advantage of attractive returns? Is Beijing suppressing the strength of the yuan through intervention? And if so, why has the amount of foreign exchange reserves not grown as a result?

China accumulated foreign reserves for decades until they reached an all-time high of US$3.99 trillion in 2014, as the PBOC bought US dollars that Chinese exporters accumulated through foreign sales, holding down the value of the yuan.