China's Reserve Accumulation as a Lab Experiment

Includes: FXI, PGJ
by: Paul Kedrosky

Think of China's reserve accumulation -- accumulating U.S. dollars to protect its currency from appreciating -- as a kind of financial mad science, like what you might have done as a kid when you took your chemistry set and combined random acids and bases to see what might happen. (Alright, that might have just been me.) My point, however, is that it is an experiment, one that is unprecedented in historical terms, as this figure from Michael Cembalest at JP Morgan shows. The x-axis is years, and the y-axis is reserves as a percentage of GDP.