The Evolution of China’s International Investment Position: From Reserve Accumulation to Reserve Issuance – ASEAN+3 Macroeconomic Research Office

Keynote Speech by Dong He¹
Chief Economist, AMRO
CICC Global Institute Macro Forum

October 13, 2026 | Bangkok

I. Introduction

Distinguished colleagues, ladies and gentlemen,

Thank you for the opportunity to discuss China’s changing external financial relations.

China’s global trade role is well established, but its international financial presence remains more limited.

Today I will trace the transformation of China’s international investment position (IIP), explain how it relates to a larger reserve-currency role for the renminbi, and consider the policies required and the implications for Asia.

II. The Structural Transformation of China’s IIP: From Liability Driven to Asset Driven

The IIP records an economy’s external assets and liabilities at a point in time; their difference is its net IIP. Comparing China with Japan and the United States highlights both the relatively modest size of China’s external balance sheet and the transformation of its composition.

Table 1 shows three configurations. The United States supplies liquid dollar claims while holding substantial foreign direct investment and equity assets. Japan is a large net creditor with extensive overseas portfolio and direct investments. China has a much smaller gross external position relative to GDP and maintains managed capital-account openness.

China’s gross assets rose only modestly, from 57% of GDP at end-2015 to 60.4% at end-2025, but almost doubled in dollar terms from USD 6.2 trillion to USD 11.8 trillion, slightly above Japan’s USD 11.6 trillion. Beneath this relative stability, official reserves fell from 31.0% to 19.2% of GDP, while outward direct investment rose from 10.6% to 18.3%. Figure 1 shows this shift toward non-reserve assets.

The Earlier Balance Sheet

In the earlier stages of reform, China’s IIP was mainly liability driven: it encouraged inward foreign direct investment to obtain capital, technology, and managerial expertise. At the same time, it accumulated substantial official reserves. This produced an asymmetric balance sheet: foreign investors held equity claims on China, while China held large amounts of relatively low-yield foreign sovereign debt.

Reserves served purposes beyond trade and exchange-rate management. With limited domestic financial depth and a partially open capital account, they also provided a precautionary liquidity buffer against external stress. Such a buffer reduces vulnerability, although it cannot eliminate the risks associated with capital-flow reversals.

However, China’s emergence as a net external creditor did not produce a positive net investment income position. Its primary income balance remained negative because China earned lower returns on its external assets than it paid on its external liabilities.

Table 2 shows that in 2025, outward direct investment earned an implied yield of 4.7%, compared with 9.6% on inward direct investment. Portfolio assets, including reserves, earned 3.3%, compared with 4.0% paid on portfolio liabilities. For the categories shown, the net income deficit was USD 128.3 billion. Dividing that deficit by the corresponding net asset position gives −5.5%; this is not a yield on gross external assets.

These results demonstrate that an external balance sheet’s composition and relative returns matter alongside its size. As overseas assets grow, durable investment income increasingly depends on host economies’ productivity and growth.

The Growing Role of Non-Reserve Assets

In recent years, China’s IIP has become more asset driven as outward direct investment, overseas lending, and portfolio diversification have grown. By 2025, residents’ non-reserve claims on the rest of the world exceeded China’s external liabilities, producing a positive non-reserve external position, as Figure 2 shows.

Chinese firms have expanded abroad in infrastructure, energy, and manufacturing as they diversify markets and reorganize supply chains. Inward FDI has slowed amid geopolitical tensions and changes in China’s economy, with a growing focus on advanced manufacturing, clean energy, and automation.

Portfolio flows have also changed. Demand for overseas diversification increased after the pandemic, while inward portfolio investment lost momentum after its expansion through 2021. Interest-rate differentials, exchange-rate expectations, and market access continue to influence both directions of investment.

“Other investment” has moved toward a sizeable net asset position, reflecting overseas lending, trade credit, and deposits placed abroad by banks, policy institutions, and companies. Official reserves have remained broadly stable in nominal value, reducing their weight as the economy grows.

The resulting balance sheet is more decentralized. Companies and financial institutions increasingly make the investment decisions that shape China’s external exposure. This creates opportunities for diversification and higher returns but also places greater demands on risk management and supervision.

Capital Flow Management with Chinese Characteristics

When my team and I at the Hong Kong Monetary Authority examined China’s prospective IIP in 2012, we assumed that capital-account liberalization would bring its external balance sheet closer to OECD benchmarks (He et al., 2012). Related studies also explored the implications of greater financial openness (Bayoumi and Ohnsorge, 2013; Hooley, 2013).

A linear extrapolation of our 2012 projection suggests that, had China fully liberalized its capital account by 2020, gross external assets could have reached about 120% of GDP by end-2025. The actual ratio was 60.4%, roughly half the illustrative counterfactual. This gap reflects China’s distinctive policy choice to pursue managed openness through regulated channels, adjusting access as domestic and external conditions change.

Clayton et al. (2025) interpret China’s staggered opening of its bond market as a strategy for building credibility while managing capital-flight risk. Their analysis highlights a central issue: international currency use depends on confidence in future access as well as the investment opportunities available today.

In forthcoming work with two colleagues, I develop a hydraulic interpretation of capital-flow management with Chinese characteristics. Inspired by the legend of Yu the Great taming the floods, our Pressure–Channel–Gating (PCG) framework organizes policy choices around underlying pressures, available channels, and the operation of gates (He et al., forthcoming).

The hydraulic analogy emphasizes the management of flows. Channels provide routes for investment, while gates regulate access and capacity as conditions change. Neither permanent closure nor unrestricted flows need be the objective.

Three interacting elements shape the outcome:

Pressure is the underlying demand for cross-border investment, driven by diversification needs, expected returns, interest differentials, and global conditions. It can change rapidly and may build when available channels are narrow.

Channels are the arrangements through which investment takes place, such as the Qualified Domestic Institutional Investor scheme, Stock Connect, Bond Connect, and access to the interbank bond market. Their development requires market infrastructure, operating rules, and institutional capacity.

Gating adjusts quotas, eligibility, and other access conditions as risks change. But unpredictable restrictions can weaken confidence, so effective gating depends on clear rules and a shared understanding of when those rules may change.

The IIP provides the balance-sheet counterpart to this framework. Whatever combination of channels and gates is chosen, sustained outward investment by Chinese residents and greater foreign demand for renminbi claims will ultimately be reflected in China’s external assets and liabilities.

III. Forces Shaping the Next Decade

Two structural forces could sustain outward investment: the international expansion of Chinese firms and residents’ demand for portfolio diversification. Policy will continue to determine how far, and how quickly, these forces translate into actual cross-border positions.

The International Expansion of Chinese Firms

As China’s economy matures, rising costs and changing returns encourage firms to locate some production overseas. Access to customers, trade barriers, and supply-chain resilience also influence these decisions. Overseas investment increasingly involves transferring production capabilities and building relationships with local suppliers.

China’s strengths in solar power, batteries, and electric vehicles provide a foundation for this expansion. The benefits for both China and host economies will depend on commercial viability, technology transfer, and integration with local businesses. Outward investment can diversify earnings, but returns are not assured: firms must manage political, regulatory, and operational risks in unfamiliar markets.

Aging and Portfolio Diversification

Population aging and slower domestic growth strengthen the case for households, pension funds, and insurers to diversify their assets. Portfolios concentrated at home remain exposed to the same domestic economic shocks that affect employment, business income, and public finances.

Foreign investments can spread those risks and broaden the sources of retirement income. Aging does not mechanically imply ever-larger capital outflows, since it also affects saving and the demand for liquidity. But it makes access to a wider range of assets more valuable. The appropriate allocation depends on investors’ liabilities, risk tolerance, and ability to manage foreign exposures.

Currency Denomination and Financial Risk

As foreign assets grow, their currency denomination becomes more important. Much of China’s external asset portfolio is exposed to foreign currencies. Renminbi appreciation against foreign currencies reduces the domestic-currency value of those assets, although the overall effect depends on liability exposures, hedging, and other valuation changes.

Denominating more foreign claims in renminbi could reduce this exposure—the “renminbization” of external assets (Cheung et al.,2011). For example, a Chinese insurer buying a renminbi bond issued by a foreign company can diversify credit exposure without taking on the currency mismatch with an unhedged foreign-currency bond.

This requires willing borrowers. Foreign firms and sovereigns will choose renminbi funding when its cost, availability, and risk characteristics suit their needs. Renminbi revenues from trade with China can help service such borrowing.

Both interest rates and exchange-rate dynamics shape the renminbi’s appeal as a funding currency (He et al., 2016). China’s 10-year government bond yield is already among the lowest in major economies. Greater exchange-rate flexibility would give the renminbi a more distinct macroeconomic cycle, strengthening its potential as a funding currency for trading partners.

This brings us to the reciprocal logic of the international monetary system: if non-Chinese residents are willing to take on renminbi liabilities, they will also have stronger incentives to hold reserve assets in renminbi.

Foreign entities borrowing in renminbi through trade settlement, Belt and Road infrastructure loans, or Panda bonds face exchange-rate and repayment-liquidity risks. To limit currency mismatches and manage these liabilities, they and their central banks are likely to hold more liquid renminbi reserve assets.

This is the core reserve-currency issuance mechanism: making local-currency claims internationally creates demand for safe and liquid reserve assets in that currency.

IV. Outlook and Illustrative Projections to 2035

Can China’s managed approach to capital flows, as described by the PCG framework, accommodate a more significant reserve role for the renminbi by 2035? Two scenarios illustrate the balance-sheet implications.

These are conditional exercises, not forecasts. Scenario A asks how much room a constrained asset position leaves for reserve issuance. Scenario B asks how much outward investment a larger reserve role would require.

Both scenarios start at end-2025. Drawing on OECD and IMF projections, China’s nominal GDP in US dollars rises from USD 19.5 trillion to USD 32.5 trillion by 2035, implying annual growth of about 5.2%. World GDP rises from USD 118.2 trillion to USD 191.8 trillion, or just under 5% annually. China’s net IIP increases from 20.9% to 26.5% of GDP, continuing its 2016–25 average rise of 0.56 percentage point a year.

In Scenario A, gross external assets remain at their end-2025 level of 60.4% of GDP. As the net IIP rises, liabilities fall by 2035 from 39.5% to 33.9% of China’s GDP and from 7.8% to 6.9% of the rest of the world’s GDP (Figures 3A and 3B). Their dollar value need not decline, but their smaller relative size leaves less room for non-residents to hold Chinese liabilities, including safe and liquid renminbi reserve assets.

Scenario B raises the renminbi’s share of allocated global reserves from about 2% to 12.28% by 2035, matching its 2025 SDR basket weight. This is an illustrative benchmark, not a forecast or policy target. If allocated reserves remain at 11.1% of world GDP, foreign official renminbi holdings rise from about USD 257 billion to USD 2.62 trillion, or 8.1% of China’s GDP. The increase of about USD 2.36 trillion represents new reserve liabilities, presumably Chinese central government bonds.

Holding the existing liability stock constant relative to China’s GDP and adding these new reserve liabilities raises total liabilities to 46.8% of GDP. With the same net IIP path, gross external assets must reach 73.3% of GDP, or USD 23.8 trillion, up from USD 11.8 trillion in 2025. Greater reserve issuance therefore requires greater investment abroad (Figure 4B).

If China’s own official reserves remain constant in nominal terms, non-reserve external assets rise from 41.2% to 61.8% of GDP. Companies and financial institutions would acquire and intermediate more foreign assets; the exercise leaves their allocation among direct, portfolio, and other investment open.

In PCG terms, diversification needs and foreign renminbi demand create pressure on both sides of the balance sheet. Broader outward channels and deeper, more accessible renminbi markets are needed to accommodate such pressures. Gating can manage adjustment risks, but cannot remove the accounting constraint linking reserve issuance to asset expansion.

The required expansion appears feasible in balance-sheet terms. Scenario B raises gross external assets from 60.4% to 73.3% of GDP, well below the ratio implied by extrapolating our 2012 projection. Assets would need to grow by about 7.3% annually in US dollars, roughly two percentage points faster than nominal GDP. Achieving a substantially larger renminbi reserve role by 2035 would nevertheless depend on market development and institutional reform that sustain foreign demand.

V. Policy Priorities

Reserve Issuance and the Financial Account

The scenarios clarify a point sometimes obscured by discussions of the Triffin dilemma. Supplying reserve assets does not require persistent current-account deficits. An economy can accumulate foreign assets while issuing liquid liabilities to non-residents. The financial account allows gross positions to expand on both sides, even when the country remains a net creditor (He and McCauley, 2012a).

For China, this means that a greater reserve role for the renminbi can coexist with continued net foreign asset accumulation. The practical task is to connect outward investment with a deep, accessible market in renminbi claims. The ability to buy an asset is only part of the requirement: foreign holders must also be able to finance, hedge, and sell it when needed.

Building the Supporting Institutions

A policy priority is to develop deeper and more resilient domestic financial markets. This requires greater policy transparency; stronger settlement, custody, repo, and hedging infrastructure; reliable market access; and wider outward investment channels backed by effective disclosure, investor protection, and oversight. Predictable capital-flow management should complement these reforms, supporting two-way investment without undermining financial stability.

VI. Implications for Asia

For Asia, especially ASEAN, Scenario A implies a relatively constrained Chinese external balance sheet. Scenario B creates more room for outward investment and foreign holdings of Chinese assets. Because neither scenario specifies the destination or composition of investment, the regional effects should be understood as opportunities and risks, not numerical forecasts.

Investment and Regional Production

Greater outward direct investment would build on an already substantial relationship. Annual Chinese FDI into ASEAN rose from about USD 8 billion in 2012 to USD 26 billion in 2025, with more than one-third going to manufacturing. Two-way goods trade exceeded USD 1 trillion in 2025, nearly 90% of it in intermediate and capital goods. China is now a leading source of new investment in ASEAN, although its accumulated presence and local institutional relationships remain less established than those of US, European, and Japanese investors.

Production links have also deepened. By 2022, China supplied about one-fifth of the foreign value added in ASEAN exports, up from 4% in 2000, while ASEAN supplied more than one-eighth of the foreign value added in China’s exports, up from 8% (AMRO, 2026a). Greater investment could deepen these networks in areas such as clean energy and transport equipment. By supporting local skills, infrastructure, suppliers, training, and technological partnerships, China can strengthen regional capabilities and its future overseas income base.

Portfolio Flows and Regional Markets

Portfolio integration in Asia lags its production links. ASEAN+3 accounted for only 9% of global portfolio investment liabilities in 2024. Just 26.9% of the region’s portfolio liabilities came from within ASEAN+3, also well below its intraregional trade and FDI shares.

China remains a small source of portfolio investment for ASEAN. On an ultimate-investor basis, the United States is still the dominant source of ASEAN+3’s inward portfolio investment and the largest outward destination for almost every major regional economy (AMRO, 2026b). As China’s external portfolio assets grow, that gap may narrow and broaden demand for Asian bonds and equities, provided deeper regional markets and stronger infrastructure can sustain the flows.

Renminbi Funding and Infrastructure Finance

Chinese banks and institutional investors could also help finance regional infrastructure and corporate expansion. Renminbi loans, onshore Panda bonds, and offshore renminbi bonds offer additional funding channels. Credible projects, transparent governance, and suitable instruments are essential to attract durable funding. Currency matching matters too: borrowers with renminbi revenues may reduce mismatches, while projects earning local currency need to weigh borrowing costs against hedging costs and exchange-rate risk.

Greater renminbi borrowing by the private sector may strengthen central banks’ demand for renminbi liquidity or reserves. The scale will depend on their reserve-management needs and confidence in market access.

Spillovers and Regional Safeguards

Stronger financial linkages could also transmit shocks through earnings expectations, exchange rates, and financing conditions. AMRO finds that regional equities have become more sensitive to China-specific movements, while the renminbi’s influence on regional currencies strengthened markedly around the 2015 reform. The US remains the stronger influence on regional bond and equity markets (AMRO, 2026b). China’s growing role therefore adds a regional source of financial transmission alongside global influences.

Changes in China’s investment channels or market access could consequently affect regional funding and asset prices. Cross-border surveillance, information sharing, and liquidity preparedness become more important. AMRO’s surveillance and the Chiang Mai Initiative Multilateralisation can help authorities identify vulnerabilities and prepare for stress, making deeper integration more resilient.

VII. Conclusion

China’s external balance sheet has already shifted toward greater outward investment by companies and financial institutions, with official reserves playing a smaller relative role. The next stage is to develop the capacity for two-way intermediation that can support a larger international role for the renminbi, a goal set explicitly by the authorities.

Our illustrative scenario shows that this goal is feasible in balance-sheet terms by 2035: raising the renminbi’s reserve share toward its SDR basket weight would require gross external assets to rise from 60.4% to 73.3% of GDP, or about 7.3% annually in US dollars—roughly two percentage points faster than nominal GDP. This expansion would require neither a doubling of the asset-to-GDP ratio nor unrestricted capital flows, although its realization would depend on market development and institutional reform.

The SDR weight is a benchmark, not a ceiling. Under the same assumptions about the net IIP and other liabilities, a more ambitious reserve share by 2035 would require faster growth in external assets to the extent that Chinese Mainland residents supply the additional reserve claims.

Not every renminbi reserve asset must be a liability of a Chinese Mainland resident. Hong Kong’s offshore market can expand supply through issuance by creditworthy foreign governments and institutions, reducing the corresponding expansion of China’s external liabilities and pressure on onshore markets. The balance between onshore and offshore markets must still be managed carefully to preserve financial stability (He and McCauley, 2012b; Bahaj and Reis, 2026).

Realizing the renminbi’s potential requires wider outward investment channels, deep and liquid renminbi markets, a credible policy framework, and predictable access for foreign investors. These reforms would allow China to supply more reserve assets while continuing to accumulate net foreign wealth. Asia could gain new investment and funding opportunities, supported by stronger regional surveillance and financial safety net. The balance-sheet adjustment is feasible; the decisive task is to build the institutions and confidence needed to sustain it.

Thank you.

¹ I thank Jerry Huang and Yannson Wang for their help preparing this speech. The views expressed are my own and do not necessarily represent the views of AMRO and its Executive Committee.

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