The Chinese government holds more foreign exchange reserves than any other country, but those assets are dwindling. A recent Economic Synopses essay explored how can China respond, and what these responses might mean for the U.S. economy.
Assistant Vice President and Economist Christopher Neely noted that China built up these reserves because the Chinese sell more goods and services than they purchase. This surplus indirectly went into buying foreign assets.
However, Neely noted that the People’s Bank of China (PBC) has been indirectly selling some of these assets to domestic residents. These residents have been diversifying their portfolios as the Chinese economy slows and domestic real estate remains highly priced. Neely wrote: “Although China has very substantial reserves, continued outflows will reduce reserves below desired levels and eventually the authorities may have to choose some combination of policies to stem these outflows.” He noted four potential responses to stemming the tide of capital outflows.
via St Louis Fed