August 20, 2012
In an effort to defend the EUR/CHF floor, Swiss FX reserves ballooned to USD 424 bn in July. That is still a lot less than China’s pool of USD 3.2 trillion but in relative terms, Swiss reserves (71% of GDP) have surpassed China’s (41% of GDP) by quite some margin. By the same token, the current account surplus in 2012 will arguably exceed USD 80 bn (13.5% of GDP) in Switzerland, which is already almost half of China’s USD 175 bn (2.2% of GDP).
The Swiss National Bank holds 60% of its reserves in EUR-denominated assets. It prefers to invest in sovereign bonds (85%), of which most have a triple-A rating. Sure, euro members would rather the Swiss bought their goods and services instead of German bonds (there is no lack of demand for them). Still, the analogy with China may be misleading: Never mind that Switzerland is a small, rich, mature democracy whereas China is a huge, middle income one-party state. More importantly, the underlying FX dynamics were dramatically different over the last decade. Chinese FX policy supported an export-oriented growth model. The Swiss current account surplus, by contrast, grew historically despite a stronger CHF. Only since the outbreak of the euro debt crisis, has Switzerland been fending off safe-haven and some speculative inflows.
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