Allocation of FX reserves matters to national wealth. As of June, China held US$3.21trn (~30.4% of GDP) in FX reserves, representing a major part of its external wealth. As forex rates move, the currency composition will affect the value of the reserves; and thus, changes in the reserves can fail to capture the true picture of FX flows. China is the world’s largest holder of reserves (29.3%) and its currency portfolio has profound implications on global asset prices and market dynamics. Perhaps because of this, China – like Japan – does not disclose the composition of its currency reserves.

We use central bank statistics to uncover the currency composition of China’s reserves. The PBoC releases monthly data on its FX reserves and FX purchase positions – the cumulative amount of RMB it has sold to purchase FX. The former are based on the market value and reported in USD, while the latter are based on the book value and reported in RMB. The discrepancy between them can be largely attributed to exchange rate movements, especially if investment returns are a stable flow (included in the reserves, but not the position). Using Bayesian regression, we examine how this gap responds to the movements of the EUR, GBP, and JPY and hence identify their weights in China’s reserves:

USD overwhelmingly dominant with ~66.7% share, higher than the 63.6% in the world’s reserves as reported by the IMF. This appears consistent with the US Treasury Department’s disclosure that China held US$1.24trn, or 38.6% of the reserves, in US treasuries as of April, not including its holdings via third parties or of other USD assets. China puts a major share of its reserves in US treasuries because they are the only market vast enough to accommodate its investment and the USD is the leading currency for external payments.

EUR assets ~19.6% of China’s reserves, below the world’s 20.4%. The global financial crisis underscores the importance of diversifying reserve investments. China seems to have increased its EUR exposure in recent years, despite the European debt crisis.

GPB’s share is ~10.6%, higher than the world benchmark of 4.8%. The Brexit has sent the EUR and the GPB down by 3.1% and 11.3% (as of July 15). Given their weights, the exchange rate movements would have posed a loss of US$57.4bn for China.

JPY underweight at ~3.1%, lower than the world’s 4.1%. It is in line with China’s holding of JPY9.5trn of Japanese bonds, or ~2.36% of the reserves by end-2015, as revealed by the Bank of Japan. The JPY’s remarkable appreciation (+14.6% YTD) should have added US$15.1bn to China’s reserves.

China’s allocation is skewed towards the USD and GBP and away from the JPY, relative to the world’s reserve portfolio. The separate identification of the RMB in IMF data on international reserves starting October will make the currency composition of China’s reserves even more different from that of the world’s, as the RMB to be used by China for external payments is not counted as reserves.