Reasons For The Change Of China's Foreign Exchange Reserve Yield

Over the past 2000-2010 years, China's per capita foreign exchange reserves rose from US $130 to US $2122, and foreign exchange reserves rose to 13.7% from GDP to 47.1%.

Foreign exchange reserve has become an important part of national wealth. How to achieve it? foreign exchange reserve Preserving and increasing value has become an important task in the current macroeconomic management.

Nominal and real return on foreign exchange reserves

The scale of China's foreign exchange reserves has far exceeded the need to cope with the insufficient liquidity of the international balance of payments and the need to intervene in the foreign exchange market.

China's fiscal expenditure will exceed 10 trillion this year. Hainan's offshore duty-free policy plans to implement five of the SASAC: the central enterprises can only manage 200 billion of the profits. The Libya government's re control of the third major cities will be puzzling after the full investment of the third cities. The Chinese foreign exchange reserve has exceeded 28000 billion US dollars as of December 2010. The scale has far exceeded the conventional demand to deal with the insufficient balance of payments liquidity and intervene in the foreign exchange market. Therefore, the function of preserving and increasing the value of wealth in the current foreign exchange reserve management is particularly prominent.

We calculated the yield of foreign exchange reserves in US dollar terms separately. Import And the service basket as the object of valuation) and the real return of foreign exchange reserves, which better reflects the real purchasing power of foreign exchange reserves. The nominal return rate of US dollar denominated foreign exchange reserves is not consistent with the real effective yield of foreign exchange reserves, especially since 2007, while the two fluctuate sharply while the nominal return of US dollar denominated foreign exchange reserves rose (decreasing), accompanied by a decline in the real effective return of foreign exchange reserves (up). This indicates that the management of foreign exchange reserves, which aims at maximizing the yield of foreign exchange reserves, may deviate from the original intention of preserving and increasing the value of real value of foreign exchange reserves.

The real return rates of the four major reserve currency assets of the US dollar, euro, yen and Sterling during the sample period are: the euro is the best, the pound is second, the yen is the second, and the US dollar is the worst.

The factors affecting the nominal yield of foreign exchange reserves denominated in US dollars can be classified into four categories: exchange rate Changes, changes in monetary assets yield, currency structure changes and asset structure changes. For the former two, foreign exchange reserve management is often powerless, and the latter two are the result of the adjustment of foreign exchange reserve management. The first two have led to the change of nominal return rate of China's foreign exchange reserve assets: on average, the nominal return rate of foreign exchange reserves explained by exchange rate changes is 40.2%, and that of each asset yield rate is 55.1%. The two explain a total of 95.3% of the nominal return rate of foreign exchange reserves.

The management can adjust the currency and asset structure to affect the rate of return on foreign exchange reserves. However, from the sample period, the effect of the active adjustment of management on foreign exchange reserve yields is very small. The change of the two represents only 4.7% of the nominal return of foreign exchange reserves. The contribution of currency structure to the change of foreign exchange reserve yield is positive in most years, which indicates that managers' adjustment of currency structure has contributed to the improvement of foreign exchange reserve yield, though these contributions are relatively limited compared with total yield changes.

The factors affecting the real return of foreign exchange reserves can be classified into six categories: in addition to the four factors determining the nominal yield, it also increases the relative price level of import trading partners and changes in the country structure of China's foreign imports. Exchange rate movements, changes in the relative price level of import trading partners, and changes in the country's structural changes in China's imports represent a change in the purchasing power of the reserve currency against a basket of Chinese imports, which is the real effective exchange rate of the currency. The change of real effective exchange rate of reserve currency explains that the real return rate of foreign exchange reserves is 43.9%, and that of monetary assets returns is 52.7%. The change of the two explains the change of the real return rate of foreign exchange reserves of 96.6%. Foreign exchange reserve managers' monetary structure adjustment during most of the sample period did not make significant contributions to the improvement of real returns of foreign exchange reserves. The impact of asset structure adjustment on the real return rate was also very limited. The change in currency and asset structure explained 3.4% of the real return rate of foreign exchange reserves.

External shocks affect external reserve yield {page_break}

The loose monetary policy of the Federal Reserve will threaten China's real return on foreign exchange reserves. The impact of the European debt crisis on nominal returns of foreign exchange reserves is uncertain, but it may increase real returns.

We empirically analyze the impact of various external shocks on nominal and real returns of foreign exchange reserves.

The Federal Reserve's looser monetary policy will raise the nominal yield of foreign exchange reserves, but will reduce the real yield of foreign exchange reserves. On the one hand, low interest rates brought about by loose monetary policy will help maintain higher bond prices; on the other hand, the depreciation of the US dollar will increase the nominal yield of non US dollar assets, because China's foreign exchange reserve yield is calculated in US dollars, and the increase in non US dollar assets yield also has led to an increase in the overall yield. Although the Fed's loose monetary policy will raise the nominal yield, it will also bring about a depreciation of the US dollar and an increase in the international price level. From the empirical results of the sample period, the negative effects of the latter two are greater. Generally speaking, the Fed's loose monetary policy will threaten China's foreign exchange reserves' real return rate. Domestic scholars and officials are worried about this.

The impact of European debt crisis on nominal returns of foreign exchange reserves is uncertain, but it may increase real returns. The impact of the European debt crisis on foreign exchange reserve yields is mainly in the following aspects: first, the European debt crisis reduces European bond prices and raises the price of US bonds; secondly, the European debt crisis drives the US dollar to appreciate; finally, the European debt crisis reduces global commodity prices. The total result of the first two sets determines the nominal return on foreign exchange reserves and the direction of uncertainty is uncertain. The three factors together affect the real return on foreign exchange reserves. From the empirical results of the sample period, the real return of foreign exchange reserves will be increased.