abstract:In economics, valuation effects of a country are the changes in the value of assets held abroad, minus the changes in the value of domestic assets held by foreign investors.
This is a flow variable and so should largely exclude currency valuationeffects, but the drawback is that it will usually overstate the amount of official FX intervention as it includes monthly foreign exchange transactions by the PBoC and commercial banks.
Of the three approaches, methods 1 and 3, using currency shares and empirics respectively to adjust for currency valuationeffects, result in robust relationships between changes in currency-adjusted FX reserves and the BOP surplus, whereas method 2 using forex purchases as an alternative proxy for adjusted FX reserves is inferior.