China Needs Balanced Approach to FX Reserves - Guan Tao

China needs to ensure it doesn't increase FX reserves to levels greatly more than needed, as increased reserves affect the independence of monetary policy and holding costs increase with diminishing marginal effect, wrote Guan Tao, a former official at the State Administration of Foreign Exchange in a blog post. The blog post was in response to recent market discussions of whether China has sufficient reserves. Increased yuan flexibility, a larger basic surplus, more private sector foreign exchange holdings, the central bank’s macro-prudential management, and FX policy adjustments constitute the "five layers of protection" to maintain the stability of China's FX market, which will reduce dependence on FX reserves, wrote Guan.