China’s forex reserves are up – and so are fears of a US trade war hit
China’s trade surplus has been the biggest contributor to its foreign exchange stockpile but that could change amid tensions with the United States
China added US$8 billion to its foreign exchange reserves last month to take the total to US$3.14 trillion at the end of March, but concerns are growing that a looming trade war could shrink the biggest source of those funds – the trade surplus.
The growth in the reserves, the world’s biggest, partially reversed February’s US$27 billion decline and continued the broader trend of steady replenishment of the stockpile, the size of which has become a barometer of confidence in the Chinese economy.
The reserves have grown in tandem with the country’s exports, hitting an all-time high of US$4 trillion in June 2014 from a mere US$212 billion in 2001, when China joined the World Trade Organisation and its exports took off.
Beijing briefly worried in mid-2014 that the stockpile was too big but those fears vanished over the next 18 months as a Chinese stock market rout and a yuan devaluation misstep triggered capital outflows, bleeding off a quarter of the reserves. The government then started to curb outflows to staunch the losses.
Over the years, the trade surplus has remained the single largest contributor to the reserves. According to China’s customs administration, the country had a US$422.5 billion trade surplus last year, with US$276 billion, or about two-thirds, from the United States.
China Minsheng Banking chief economist Wen Bin said the trade surplus gave solid support for the stability of the forex reserves last month.
“However, trade uncertainties remain given the China-US trade frictions,” Wen said.
Those uncertainties prompted the State Administration of Foreign Exchange to single out international political factors for the first time in releasing the figures.
“Financial markets may face uncertainties since the international political and economic environment remains complex and fast changing,” it said in a statement on Sunday.
Nevertheless, it expected the reserves to be stable overall in terms of international balance of payments and cross-border capital flows.
Beijing and Washington have exchanged fire over the trade imbalance, which totalled US$375 billion last year, according to US data.
US President Donald Trump demanded in February that the gap be cut immediately by US$100 billion, a move followed by his administration’s decision to impose 25 per cent tariffs on US$50 billion worth of Chinese merchandise and threats to target another US$100 billion in goods after Beijing hit back with reciprocal tariffs.
Yan Se, from Peking University’s Guanghua School of Management, said there was still room to manoeuvre.
“Despite the heightened tone, both have actually left enough buffer areas and opportunities for negotiation. For instance, their lists of tariffs have not detailed a date for implementation,” Yan said.
He also said Beijing was unlikely to heed domestic calls to retaliate by selling US Treasury bonds because it would have little impact.
“Although China is the largest foreign holder, it has a small proportion of the total … More important, both countries have no intention to escalate their friction,” Yan said.
Beijing’s holdings of US Treasury bills totalled US$1.17 trillion at the end of January, a rise of US$117 billion from a year earlier, according to US Treasury data. China’s real holdings of US Treasuries could be much bigger, if Beijing’s proxy accounts are factored in.
Chinese Premier Li Keqiang said last month that China was a “responsible investor” and its forex strategy was based on market rules and portfolio diversification.
Vice finance minister Zhu Guangyao went a step further last week to say that investment safety, liquidity and returns were the top three considerations for such investment.
On the sidelines of the Boao Forum for Asia in Hainan province on Sunday, Zhang Yuyan, head of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, said China had no intention of allowing the trade dispute to spill over into finance, saying the possibility of China selling its US Treasury holdings in a trade war was “very small”.
“There should be a firewall between trade problems and financial ones,” Zhang said.
He also said a fully fledged trade war with the US was not a sure thing.
“Maybe one or two days before the actual implementation [of the tariffs on US$100 billion worth of Chinese goods], the US side will gain its reason and sense,” Zhang said. “There are many cases of compromises being reached at the last minute.”
Additional reporting by Liu Zhen in Boao