Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments April 24, 2009 erstellt
Description:
One of the puzzles about the Chinese economy has been the huge amount of foreign reserves that China holds. By conventional standards, China's reserve holdings are simply more than enough for its external trade and debt obligations. This research however argues that the overall level of China's foreign reserves is actually within the range of optimum if the reserves are viewed as China's self insurance against catastrophic events from the world economy or from the country within. Taking possible output losses following an economic/financial crisis to be equivalent to 5%, 10%, 15%, 20% and 25% of China's GDP, respectively, the nation's reserve holdings before 2002 were found to be close to the lower 5% limit. For the period from 2002, China's reserve holdings are still within the upper limit given by the assumption that a major economic failure may cause its GDP to decline by 25%. This shows that precautionary consideration has consistently been the dominant motive of China's reserve policy. Meanwhile, the Chinese monetary authorities have become more risk aversive since 2002 and more conservative in estimating the probability of an economic failure and its possible fall-out when evaluating its reserve positions