As seen in the chart, China's FX reserves have remained flat lately despite the massive balance sheet expansion of the Fed. Though out of the temporal domain of this chart, if it were extended back to 2008 we would see the ensuing years saw a large increase in China's FX reserves.

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I can think of a few possible explanations ranging from political tension to dollar liquidity needs, but I don't think I can take my explanations beyond conjecture.


What is a logical explanation for the recent divergence between Fed liabilities and China's FX reserves?


1 Answer 1


There is no necessary relationship. Canada is a major trading partner of the United States, and the Fed can increase its balance sheet without Canada increasing its official reserve holdings. Why should China be different?


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