Accumulation of Large Foreign Reserves in China: A Behavioural Perspective

Zhang, Z.; Chau, F.; Li, X.

Abstract

The massive accumulation of foreign reserves by China has challenged the conventional thinking about prudent reserve management. This paper develops a behavioural model of optimal decision making under uncertainty to explain the observed Chinese reserve policy. Departing from the conventional approach to utility maximisation based on the agent’s rationality, this paper explicitly models the behaviour of Chinese central banker who is influenced by loss aversion and narrow framing. Embedding the cognitive biases into the precautionary savings approach to holding reserves, the paper shows the behavioural optimality of Chinese reserve build-up and provides a plausible explanation of the dynamics of reserve accumulation in China, hence help make sense of the puzzling Chinese reserve policy.

Citation

Zhang, Z., Chau, F., & Li, X. (2013). Accumulation of Large Foreign Reserves in China: A Behavioural Perspective. Economic Change and Restructuring, 46(1), 85-108. https://doi.org/10.1007/s10644-012-9136-1

• Journal Article Type: Article
• Publication Date: Mar 1, 2013
• Deposit Date: Feb 12, 2013
• Publicly Available Date: Mar 4, 2015
• Journal: Economic Change and Restructuring
• Print ISSN: 1573-9414
• Electronic ISSN: 1574-0277
• Publisher: Springer
• Peer Reviewed: Peer Reviewed
• Volume: 46
• Issue: 1
• Pages: 85-108
• DOI: https://doi.org/10.1007/s10644-012-9136-1
• Keywords: Reserve accumulation, Precautionary savings, Behavioural finance, Loss aversion, Narrow framing, C61, F31, F43, G02.
• Public URL: https://durham-repository.worktribe.com/output/1466758