from Follow the Money

Does China have a higher - or lower - fraction of its reserves in dollars than Russia

August 2, 2005

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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David Altig has highlighted Russia's decision to reduce the dollar's share of its reserves from 70 to 65%.   

Russia raised the share of Europe's single currency to 35 percent from 30 percent, reducing the dollar portion to 65 percent from 70 percent, the central bank said in a statement yesterday on its Web site...

With about $140 billion in reserves, and with its reserves increasing by about $15 billion a quarter even as it pays down its debt, Russia certainly matters.   If it had keep a constant 70% dollar share as its reserves increased from say $140 b to $200 b, Russia would add about $40 billion to its dollar reserves.  Cutting the dollar's share to 65% (gradually) implies it will only add $30 billion to its dollar reserves over the same period.

That matters, but not half as much as what China opts to do with its reserves. After all, the 2005 increase in China's reserves will be close to $300b, or two times Russia's total holdings of reserves.

The big question is whether China already has a lower fraction of its reserves in dollars than Russia.   Lots of people think so - many estimate the dollar's share of China's reserves at only 65% of so (see my previous post).  Personally, I suspect China keeps about as much of its reserves in dollars as Russia - about 70%, maybe a bit more. 

Why?  Largely because I cannot find sufficient flows into the eurozone to account for the gap between recorded inflows from China into the US and the observed increase in China's reserves.   That, in a nutshell, is 1/2 the argument I tried to make yesterday.  There are only so many places you can invest $300 billion a year ...  the other half is that if even one third of China's reserves are going into euros, that is a rather substantial inflow into a region that does not have a current account surplus, and by driving down euro rates, it makes the dollar more attractive to private investors.

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