The Nation Allocates Dollar Reserves to Hong Kong: A New Foreign Exchange Reserve Management Strategy and the Push for RMB Internationalization – FOFA Economic Analysis
- FOFA
- Apr 23
- 3 min read
In 2025, the global economic landscape remains complex and volatile. Uncertainty in U.S.-China relations and fluctuations in international financial markets present new challenges for China’s economic policies. Against this backdrop, the Chinese government has introduced a series of new foreign exchange (FX) reserve management initiatives to further support Hong Kong's status as an international financial center while simultaneously advancing the internationalization of the Renminbi (RMB). These policies aim to inject confidence into the global economy, fostering stability and growth.
Optimizing FX Reserve Allocation: Hong Kong as a Strategic Hub
In mid-January 2025, Pan Gongsheng, the governor of the People’s Bank of China (PBOC), announced a significant increase in the allocation of national foreign exchange reserves to Hong Kong. This move is regarded as a major adjustment to China's FX reserve management strategy. Market analysts suggest that this shift could more than double Hong Kong's allocation of FX reserves in the long term, potentially reaching up to 50% of the total reserve allocation in the future.
As a leading offshore RMB center, Hong Kong’s highly liberalized and internationalized financial market makes it an ideal platform for diversifying China’s FX reserves. Economists highlight that this adjustment not only helps diversify investment risks but also injects significant liquidity into Hong Kong’s stock and bond markets. Eddie Yue, Chief Executive of the Hong Kong Monetary Authority (HKMA), reported to legislators that the additional FX reserves would primarily flow into Hong Kong's equity and bond markets, significantly improving liquidity and boosting investor sentiment.
The Stabilizing Role of Hong Kong’s Financial Market
As a long-standing international financial center, Hong Kong plays a critical role in the global economy. Its currency peg system, which ties the Hong Kong dollar (HKD) to the U.S. dollar, provides stability to its financial markets. Although the beginning of 2025 saw some pressure on the ratio of HKD in circulation to FX reserves, the PBOC’s explicit support has reassured the market. Measures such as supplying RMB 100 billion in trade financing tools and introducing offshore RMB repurchase agreements (repos) have effectively supported the offshore RMB exchange rate while also stabilizing the HKD exchange rate.
Hong Kong has successfully navigated through several global financial crises, including the 1997 Asian financial crisis and the 2008 global financial crisis. Amid heightened U.S.-China tensions, Hong Kong’s financial market stability and flexibility continue to serve as a "buffer," helping mitigate external pressures.
Driving the Internationalization of the RMB
The PBOC’s initiatives aim not only to support Hong Kong’s financial markets but also to accelerate the internationalization of the RMB. By increasing FX reserve allocations to Hong Kong, the central bank has provided additional liquidity to the offshore RMB market. The introduction of offshore RMB repo agreements offers international market participants more short-term financing options, enhancing the attractiveness of the RMB.
Moreover, the diversification of China’s FX reserves reflects the strategic goal of RMB internationalization. According to the PBOC, China’s FX reserve investment portfolio spans more than 30 currencies and 50 asset classes, demonstrating a broad footprint in global financial markets. While the U.S. dollar still constitutes a significant portion of these reserves, the diversification reduces reliance on a single currency and strengthens the RMB’s international status.
Looking Ahead
China’s new FX reserve management strategy is not only a proactive response to the current global economic environment but also a long-term strategic plan for safeguarding the nation’s economic and financial security. By supporting the stability of Hong Kong’s financial markets, China has further solidified its position as a key participant in the global economy. At the same time, the accelerated internationalization of the RMB will offer more options for global trade and investment, fostering the diversification of the international financial system.
In the future, as China continues to open up and reform its economy, Hong Kong will maintain its unique role as a bridge between China and the global financial system. This will provide critical support for deeper integration between the Chinese and global economies. Meanwhile, the flexibility and foresight of China’s FX reserve management will contribute even more to global economic stability and prosperity.
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