As global yuan use expands, questions resurface about China’s world-leading forex reserves | South China Morning Post

A report from a leading Beijing university has revived discussions about the “optimal size” of China’s foreign exchange reserves – with a focus on US Treasuries – calling for its world-leading forex holdings to be trimmed to a “moderately ample” level amid the drive to promote further international use of the yuan.

The report, written by Sun Jiaqi from Renmin University’s International Monetary Institute and issued on Friday, examined possible ways forward and their implications for China, which has hosted the world’s largest forex reserves since February 2006.

“For the yuan’s internationalisation, maintaining moderately ample forex reserves can support the currency,” Sun wrote. “That said, a gradual reduction will be inevitable, once the yuan matures and becomes more adopted globally as a medium of settlement and storage of value, supported by a large circulation abroad.

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“At that point, China may no longer need to hold excessive foreign currency assets as a precaution, since the yuan can replace many of the roles once played by foreign reserves.”

The report said that a desirable size for the reserves of an emerging market economy would be around 11.49 per cent of its gross domestic product, citing research by analysts from China Securities Depository and Clearing and China Construction Bank.

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China’s forex reserves stood at US$3.42 trillion in February, according to the State Administration of Foreign Exchange, equivalent to about 16 per cent of the country’s GDP last year. They have hovered above the US$3 trillion mark since at least 2020.

With Beijing seeking to increase global use of the yuan, calls have been mounting for it to review its forex reserve strategy.