Hitotsubashi Institute for Advanced Study


Reserves and Risk: Evidence from China


China holds more international reserves than any other country. We consider if the Chinese accumulation of reserves is associated with unintended consequences in the form of increased private sector risk taking. Using sovereign credit default swap spreads and stock index prices as indicators of risk taking we provide evidence to suggest that as reserve holdings increase, so does the willingness of the private sector to take on more risk. This is an important finding that adds credence to the suggestion that insurance through costly reserves, to be used in the event of a crisis, may lead to provide sector actions that in and of themselves make it more likely that this insurance will be used.

Report No.: HIAS-E-98
Author(s): Rasmus Fatum(a)
Takahiro Hattori(b)
Yohei Yamamoto(b)
Affiliation: (a) School of Business, University of Alberta, Edmonton, Alberta, Canada, T6G 2R6
(b) Department of Economics, Hitotsubashi University, 2-1 Naka, Kunitachi, Tokyo 186-8601 Japan
Issued Date: May 2020
Keywords: international reserves; risk taking; China
JEL: F31, G15