This paper examines how China allocates its newly accumulated foreign assets by analyzing the long-run relationship between net national savings, foreign exchange reserves, and outward direct investment (ODI). Using quarterly data from 2005 to 2023, a cointegrated vector autoregression framework shows that ODI—particularly through state-owned enterprises— has emerged as an important channel for recycling national savings abroad. Although short-run reserve fluctuations persist, sustained reserve accumulation has become less central to China’s external asset management. This study contributes to the literature by highlighting the institutional role of state ownership in shaping cross-border investment patterns and by identifying ODI as a strategic mechanism for channeling national savings internationally. The findings shed new light on China’s evolving approach to external asset allocation and its broader economic and geopolitical implications.

In recent years China has faced an increasing trilemma - how to pursue an independent domestic monetary policy and limit exchange rate flexibility, while at the same time facing large and growing international capital flows. This paper analyzes the impact of the trilemma on China's monetary policy as the country liberalizes its goods and financial markets and integrates with the world economy. It shows how China has sought to insulate its reserve money from the effects of balance of payments inflows by sterilizing through the issuance of central bank liabilities. However, we report empirical results indicating that sterilization dropped precipitously in 2006 in the face of the ongoing massive buildup of international reserves, leading to a surge in reserve money growth. We estimate a vector error correction model linking the surge in China's reserve money to broad money, real GDP, and the price level. We use this model to explore the inflationary implications of different policy scenarios. Under a scenario of continued rapid reserve money growth (consistent with limited sterilization of foreign exchange reserve accumulation) and strong economic growth, the model predicts a rapid increase in inflation. A model simulation using an extension of the framework that incorporates recent increases in bank reserve requirements also implies a rapid rise in inflation. By contrast, model simulations incorporating a sharp slowdown in economic growth lead to less inflation pressure even with a substantial buildup in international reserves.

Sovereign wealth funds (SWFs) form a new class of institutional investors with significant influence on the global financial market. Assets under management (AUM) of global SWFs totaled around US$3.0 trillion at the end of 2007, and are still rising. Three developments are behind the current cause of SWFs: First, reform of international monetary system is the core reason for the rise in SWFs; Secondly, the phenomenal raise of energy price is an important reason contributing in the expansion of SWFs; finally, the economic globalization facilitates SWFs’ operation. According to the model of "National Economic Man" model, the foreign reserve of a nation will increase sharply and gradually this nation will invest surplus wealth during the economic stage of early expansion or fast-growing stage. Whereas, with the decreasing of the production factors, accumulated wealth of a nation will gradually attain to peak. When the economy enters into wealth-oriented stage or the stage of sustainable low growth, the nation will increasingly rely on wealth accumulated by consumption, and incline to invest in risk-free assets. At present, the aims of SWFs are mainly focused on the following five aspects, including stabilization the national balance sheet for different periods, diversification of the central bank's reserves, smoothening inter-generation revenue of country, prevention of national socio-economic crisis and assistance of the government’s overall development strategy.

Sovereign wealth funds (SWFs) form a new class of institutional investors with significant influence on the global financial market. Assets under management (AUM) of global SWFs totaled around US$3.0 trillion at the end of 2007, and are still rising. Three developments are behind the current cause of SWFs: First, reform of international monetary system is the core reason for the rise in SWFs; Secondly, the phenomenal raise of energy price is an important reason contributing in the expansion of SWFs; finally, the economic globalization facilitates SWFs’ operation. According to the model of "National Economic Man" model, the foreign reserve of a nation will increase sharply and gradually this nation will invest surplus wealth during the economic stage of early expansion or fast-growing stage. Whereas, with the decreasing of the production factors, accumulated wealth of a nation will gradually attain to peak. When the economy enters into wealth-oriented stage or the stage of sustainable low growth, the nation will increasingly rely on wealth accumulated by consumption, and incline to invest in risk-free assets. At present, the aims of SWFs are mainly focused on the following five aspects, including stabilization the national balance sheet for different periods, diversification of the central bank's reserves, smoothening inter-generation revenue of country, prevention of national socio-economic crisis and assistance of the government’s overall development strategy.

It is a striking economic phenomenon that China’s foreign exchange reserves reached $US 606.9 billion. This paper pursues to explore the underlying motivations and implications by not only analyzing the complicated relationships between the Chinese economy and foreign exchange reserves but also establishing a tentative model to evaluate the adequacy of foreign exchange reserve holdings. The model has successfully confirmed that China’s recent holdings of foreign exchange reserve, in particular in 2004, appeared to exceed the adequate level largely due to speculative hot money inflows when the Chinese currency Renminbi had been expected to appreciate.