A Study On The Measurement For The Sovereign Credit Risk Risk Of China’s Foreign Exchange Reserves

With the rapid development of China’s economy and the continuous improvement ofthe level of opening up, China’s foreign exchange reserves grows at a very fast speed. In1966, China’s foreign exchange reserves exceeded100billion U.S. dollars, exceeded onetrillion U.S. dollars and ranking first in the world in2006, to exceed3trillion U.S.dollars in2011. The increasing of foreign exchange reserves has many benefits, it’s alsoa symbol of the improvement of China’s economic entities and overall national strength.However, the excessive growth of foreign exchange reserves is also accompanied by acorresponding increase in opportunity cost. More foreign exchange reserves also meanshigher risk, in general, include: exchange rate risk, interest rate risk, liquidity risk,political risk, credit risk, operational risk. Through the analyzed of the research results offoreign exchange reserves of domestic and foreign,this article measured and carry outsome research of the sovereign credit risk of China’s foreign exchange reserves, to someextent, it deepen and expand the risk management measure of credit risk and the researchof foreign exchange reserves of China.First, this paper introduces the development situation of China’s foreign exchangereserves, including its function, the appropriate scale, currency structure, the reason ofthe increase, and the risk category. Then, focuses on the credit risk of foreign exchangereserves, elaborated the concept of sovereign credit risk and analysis of the trends andcauses of the U.S. sovereign credit risk, as well as the impact on China. After that, on thebasis of several traditional used measure of credit risk, proposed a sovereign credit riskmeasurement methods based on unexpected loss and expected loss, and take the U.S.dollars as an example, calculated and researched the sovereign credit risk of China’sforeign exchange reserves. According to the estimated result, we know that beforeAugust2011, the sovereign credit risk and its volatility of China’s foreign exchangereserves is not large. But, due to the decline of the U.S. sovereign credit rating in August2011, sovereign credit risk and volatility of the foreign exchange reserves havesignificantly improved. Finally, a theoretical method for managing credit risk and givessome policy recommendations.