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China Economy

China’s foreign exchange reserves rise to nine-month high of US$3.08 trillion

Reserves up for a sixth straight month due to tighter controls on capital outflows and a weaker US dollar

PUBLISHED : Monday, 07 August, 2017, 5:12pm
UPDATED : Monday, 07 August, 2017, 11:03pm

China’s foreign exchange reserves rose more than expected in July to a nine-month high as the yuan strengthened, but analysts said Beijing would keep its tight grip on capital outflows.

Reserves rose by US$24 billion during the month, to US$3.08 trillion, compared with an increase of US$3.2 billion in June.

July marked the first time since June 2014 that China’s reserves had climbed for six months in a row, with the gains taking reserves to their highest level since October.

China’s forex reserves hit a seven-month high

The rise was mainly attributed to the increased value of non-US dollar assets in China’s forex reserve portfolio, said Liu Jian, a senior analyst with the Bank of Communications in Shanghai.

With the US dollar index hitting a nearly one-year low this month, the Chinese currency advanced to its highest level since last October, forcing major research houses to revise upwards their estimates of the yuan’s value.

However, Xie Yaxuan, the chief macro analyst at China Merchants Securities, warned that it had been hard to evaluate the real supply and demand pressures on the yuan since the People’s Bank of China added a counter-cyclical factor to its daily fixing formula in May.

China eases yuan outflow controls in sign of recovered confidence

“We believe the pressure of capital outflows will still exist,” Xie said. “The yuan exchange rate will fluctuate in a range, rather than [exhibiting] one-way appreciation.”

The US dollar could also rally if the Federal Reserve started a substantial downsizing of its balance sheet.

“The [Chinese] central bank may wait to confirm that the stronger yuan has prevented net capital outflows,” Iris Pang, a Greater China analyst at ING, wrote in a research note. “We do not expect the current appreciation speed to be sustained in August.”

Time right to loosen controls on yuan-dollar exchange rate, says China state-run paper

Strict capital controls were put in place at the end of last year, when both the yuan and China’s forex reserves had fallen to yearly lows. The recent recovery in the reserves, which grew by US$89.7 billion in the first half of this year, does not seem to have been enough to convince Beijing to remove the control measures, despite growing talk about increasing the yuan’s flexibility.

Instead, China is expected to expand the yuan’s daily trading band against the greenback to 3 per cent from the current 2 per cent, a symbolic move to show confidence in the currency.

Beijing has intensified its scrutiny of large outbound investments since its National Financial Work Conference last month. It is also trying to encourage inflows through opening up its bond and securities markets.

China eases yuan outflow controls in sign of recovered confidence

China burned through nearly US$320 billion in reserves last year, but the yuan still fell by about 6.5 per cent against the then surging US dollar, its biggest annual drop since 1994.

The yuan has steadied since then, rebounding more than 3 per cent this year, thanks largely to the reversal in the dollar and fresh steps by Beijing to flush out speculators who were betting on further depreciation of the currency.

The value of gold reserves rose to US$75.08 billion at the end of July, from US$73.59 billion at the end of June, according to figures on the People’s Bank of China’s website.

Additional reporting by Reuters