Usd Dollar as Reserve Currency Issues

One of the financial developments which is iconic for the past 5 years is the vast outflow of US dollars as a foreign currency reserve to Asia. As a matter of fact this development is still ongoing and increasing every year. Whereas Japan used to be the main holder of USD’s as a currency reserve in Asia, China has overtaken it to become the world largest holder of US dollars. It is obvious that China is fast growing economy with already the second largest GDP in the world which could have inflicted this process. However, the fact that they have a quickly growing economy by itself does not necessarily result in increasing USD reserves. In order to get a complete picture of what moves this development an extensive analysis of its respective exchange rate regime and balance of payment is required. This can subsequently be used to look at future developments with corresponding issues.

China as world’s largest US dollar reserve holder

It was not until the late nineties that China’s reserve holding started growing rapidly. Since then it has grown by more than 1000%. Whereas in 2001 China held over 200 billion US dollars worth of foreign reserves, this amounted to over 3 trillion US dollar in 2011. Table X shows this development more detailed. The main reason that it was able to build up these large reserves were its economic policies. Mainly encouraging domestic savings and heavily focus on exporting.

Today China is the largest holder of Foreign exchange reserves worldwide. Remarkable is that China alone holds more FX reserves than Japan, Russia, Saudi Arabia, Taiwan, Brazil and South Korea combined. This is illustrated in figure X.

The People’s bank of China, which is the central bank in China, does not make the exact amount of US dollars known to the public. However, financial analysts estimate the percentage to be around 70%. As mentioned before, one of the main factors allowing China to build up this vast stock of US dollars is it increasing Balance of...