Reserve accumulation and exchange rate policy in China: The authoritarian elite's aim of political survival

•In the last decades China accumulated a huge amount of foreign exchange reserves.•In this way the elite pursued the political survival of themselves and the regime.•The main instrument of this policy was the real undervaluation of Renminbi.•These policy choices determined a redistribution of income, with winners and losers.•The elite controlled the winners' and losers' behavior by influencing their collective action costs.

Since the Asian financial crisis of 1997-1998, China has significantly increased its foreign exchange reserves. We argue that the resulting abnormal levels of currency reserves accumulated by Chinese authorities are not intended to maximize the citizenry's economic welfare, as in a mercantilist or a precautionary account, but rather to forestall the elite's own political demise. This goal has been pursued mainly by generating large current account surpluses through manipulation of the renminbi exchange rate. The Chinese elite has sought to promote the acceptance of this policy by influencing the costs of collective action taken by winners and losers.