Management of foreign exchange reserves

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For many countries, especially in the emerging markets, the official foreign exchange reserves are both a major national asset and a crucial tool of monetary and exchange rate policy. It is vital therefore that this national resource is used and
managed wisely and effectively.
Management of reserves is a complex and time-consuming business. It requires clear objectives, extensive delegation, strong control systems, open and transparent reporting and a realistic appreciation of the constraints faced. If conducted properly, openly and successfully it will greatly strengthen the public’s respect for and confidence in official policy, and can make a material contribution to successful macro-economic management.

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Introduction...............................................................................................................3
1.Theoretical aspects of foreign exchange reserves.................................................4
1.1. Objectives and reasons for holding reserves...........................................4
1.2. The optimum size and ownership of the reserves....................................9
2. Delegation,control and reporting of foreign exchange reserves..........................12
2.1. Delegation and control...........................................................................12
2.2. The importance of reporting...................................................................17

3. Management of China's foreign exchange reserves............................................21
3.1. China's foreign exchange reserves and SAFE........................................21
3.2. Recommendations..................................................................................30
Conclusion...............................................................................................................36

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Last, but not least, SAFE may establish a separate SWF under its authority, but at arm’s length, while all excess reserve funds could be transferred to this institution. Several major advantages are associated with this change. Most importantly it provides the opportunity for greater transparency, therefore alleviating concerns raised by foreign observers. Although it may create a domestic rivalry for CIC, it is believed that such competition already exists, and from the government perspective, such competition might be positive; such positive benefits

are particularly the case if certain a mechanism is pre-arranged and establishes a complementary competition platform between the three major institutions managing the Chinese FX reserves, i.e. SAFE, CIC and CIC 2.

 

List of references

 

  1. Management of Foreign Exchange Reserves at the Central Bank of Chile 2011
  2. http://en.wikipedia.org/wiki/Foreign_exchange_reserves
  3. http://foreign-exchange-reserves.com/familiar-history-foreign.html
  4. Nugйe, John  “Foreign Exchange Reserves Management”, Handbooks in Central Banking no.19
  5. “FX reserve management: elements of a framework” Claudio Borio, Jannecke Ebbesen, Gabriele Galati and Alexandra Heath, March 2008
  6. Risk management for central bank foreign reserves, Editors: Carlos Bernadell (ECB), Pierre Cardon (BIS), Joachim Coche (ECB), Francis X. Diebold (University of Pennsylvania) and Simone Manganelli (ECB)
  7. Published by: European Central Bank, May 2004
  8. http://www.tabb.net/benchmark.htm
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  11. Preparing for management’s Assessment under section 404 of the Sarbanes-Oxley Act
  12. http://www.icac.nsw.gov.au/preventing-corruption/responding-to-corrupt-conduct/external-reporting/4886
  13. Management of China’s Foreign Exchange Reserves: A Case Study on the State Administration of Foreign Exchange (SAFE)
  14. The Management of China’s Huge Foreign Reserve and its Currency Composition, Authors: Liu Pan, Zhu Junbo, 2008
  15. How to Manage China’s Foreign Exchange Reserves? Aarhus School of Business MSc in Finance and International Business November 2007

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