Adjusting the Currency Composition of China’s Foreign Exchange Reserve

During the sovereign debt crisis, the national credit of some developed economic entities has been degraded repeatedly. It is adjusting the currency composition of China’s foreign exchange reserve that becomes an important risk management tool. In this paper, we first make an analysis on possible currency composition of China’s foreign exchange reserve combining data from the Treasury International Capital System of United States with IMF Currency Composition of Official Foreign Exchange Reserve, and then discuss the currency composition of minimum variance risk within the framework of Mean-Variance Analysis. Afterwards, a dynamic adjusting route from the real composition to the optimal structure is built up through the dynamic optimization approach. It is found that converting dollar assets to yen assets according to the optimal schedule will lower the risk of foreign exchange reserve effectively.