China’s forex reserves keep up growth spurt, expanding room for reform
Weaker US dollar and domestic rebalancing push total up but questions remain over prospects for economic growth in the second half, analyst says
China’s foreign exchange reserves rose for the third month in a row in April, staying above the psychologically important US$3 trillion mark and giving the leadership more room to move on tough domestic issues such as structural reform.
The reserves grew by US$20 billion from a month earlier to end April on US$3.03 trillion, due a better balance in the domestic forex market and a rise in the value of non-US dollar assets in the country’s portfolio, the State Administration of Foreign Exchange (SAFE) said on Sunday.
China Merchants Securities analyst Yan Ling said US bonds alone contributed US$18.4 billion to the forex increase.
“The US dollar index is likely to remain weak and this will be good for expectations for the yuan exchange rate,” Yan said.
Bank of Communications analyst Liu Jian said a fall in the US dollar index and a more stable mainland economy eased expectations of further falls in the yuan and slowed capital outflows.
“Capital outflows will become more challenging in the second half when the uncertainties of China’s economic growth increase and the US Federal Reserve continues to raise interest rates.” Liu said. “However, it’s basically controllable.”
Beijing imposed strict capital controls late last year when then US president-elect Donald Trump’s promises of fiscal expansion and the Fed’s interest rate rises drove up the US dollar index and accelerated outflows.
As the yuan rapidly approached 7:1 against the greenback and its forex reserves dropped below US$3 trillion in January, the central government stepped up reviews of “irrational” outbound investments and tightened forex purchases by individuals.
The subsequent recovery in global manufacturing greatly boosted trade in emerging markets, with China’s exports growing 8.2 per cent year on year in the first quarter. Meanwhile, the policy uncertainties of the Trump administration and a recovery in the euro zone sent the US dollar index to a six-month low of 98.5 to the euro.
In an article published in the Beijing-based Modern Bankers magazine on Sunday SAFE chief Pan Gongsheng signalled a return to confidence.
“The opened door will not be closed,” Pan wrote, referring to already fully opened current account items, direct investment and securities items like the qualified foreign institutional investor and stock connect programmes. “China needs to find the right pace and process of capital account opening-up by considering both domestic and external factors at different times.”
But the upcoming US interest rate hike, widely expected next month, and the shrinking of the Fed’s balance sheet will put more pressure on the mainland where financial risks have built up through years of credit expansion and shadow banking.
“It means a further tightening of monetary policy when the US interest rate up-cycle overlaps China’s super financial down-cycle,” Guotai Junan Securities analyst Wei Feng said. “The People’s Bank of China may raise interbank rates by 25-30 basis points over the rest of the year and that will affect the domestic economy.”
The central bank has held off increasing benchmark rates but it is pushing up interbank rates and is more reluctant to provide easy money as the country pushes ahead with deleveraging.
These moves, together with wide-ranging property curbs, are expected to drag down the pace of growth towards the end of the year.