The difference between foreign exchange holdings and foreign exchange reserves

  1. Foreign exchange reserves are priced at market value, and foreign exchange holdings are priced at historical cost. Foreign exchange reserves only reflect the amount of base currency paid by the central bank to obtain foreign exchange, and foreign exchange reserves are the central bank’s investment in foreign exchange reserves.
  2. Foreign exchange holdings include the central bank’s foreign exchange holdings and financial institutions’ foreign exchange holdings. The former is on the central bank’s balance sheet and the latter is on the credit balance sheet of financial institutions. The central bank’s foreign exchange funds will lead to the release of base currency.
  3. The difference between foreign exchange reserves and the increase in foreign exchange reserves is related to the investment portfolio. For example, from 2001 to 2011, the central bank’s purchases of US bonds accounted for 35% of all foreign exchange reserves, and the appreciation of the U.S. dollar can bring about an increase in foreign exchange reserves.

The difference between foreign exchange holdings and foreign exchange reserves

What are the reasons for the difference between foreign exchange holdings and foreign exchange reserves?

There are three main reasons:

First, foreign exchange reserves reflect the cost of RMB when acquiring foreign exchange assets, and foreign exchange reserves are foreign exchange assets denominated in US dollars at the time of statistics.

Second, the foreign exchange reserves are not only the U.S. dollar, there are also Euros, Japanese Yen, etc. The exchange rate changes of these foreign exchanges relative to the U.S. dollar make foreign exchange reserves denominated in U.S. dollars fluctuate.

Third, foreign exchange reserves are for foreign investment, and foreign investment will have gains (of course, they may also be losses). These are not reflected in foreign exchange holdings, but are reflected in foreign exchange reserves.

Of course, there may be differences in the statistical calibers of SAFE and the Central Bank, but I am not clear about this.
China’s foreign exchange reserves

to sum up:

First of all, foreign exchange reserves reflect the cost of RMB when acquiring foreign exchange assets, and reflect historical costs. This cost will not change once acquired; while foreign exchange reserves are foreign exchange assets denominated in US dollars at the time of statistics. The U.S. dollar exchanged for 10 billion renminbi may be worth 12 billion renminbi now. This 2 billion renminbi is one of the sources of the difference between foreign exchange reserves and foreign exchange reserves.

Secondly, China’s foreign exchange reserves are not only the US dollar, but also the euro, the British pound, the Japanese yen, etc. These international currencies will also affect foreign exchange reserves when they undergo drastic changes (for example, the British pound depreciates and the yen appreciates after the Brexit referendum) .

Finally, SAFE will also invest in US dollars. Even if it is just buying US debt, there will be gains and of course losses. These data will not be reflected in foreign exchange reserves, but in foreign exchange reserves.