Explainer | Why did China’s forex reserves fall by US$22 billion in September?

China’s foreign exchange (forex) reserves, by far the world’s largest, unexpectedly dropped by US$22 billion in September to US$3.1426 trillion, according to data released by the State Administration of Foreign Exchange (SAFE) on Wednesday.

Why does China’s drop in forex reserves matter?

The monthly change in China’s forex reserves is released on the seventh day of every month and is read as a measure of capital flows. Given China’s current account surplus, a drop in reserves could mean that there were money outflows from the country under its capital account.

Another explanation is that the strengthening US dollar, which accounted for 58 per cent of China’s reserves in 2019, could result in a drop in the total value of reserves because assets in other currencies, from the euro to the yen, would be smaller relative to a stronger US dollar.

What currency is China buying as it cuts reliance on US dollar?

China has increased its purchases of Japanese government bonds to the highest level in three and a half years, as Beijing seeks to cut its reliance on US dollar assets. From April to July, the Chinese bought 1.46 trillion yen (US$13.82 billion) – or 3.6 times the amount from a year earlier, Nikkei reported, citing data from Japan’s Ministry of Finance and the Bank of Japan.

China does not publish a detailed account of its current foreign exchange reserves, as it considers this information a state secret.

China could gradually cut its holdings of US Treasury securities by about 20 per cent to US$800 billion to insulate itself from tensions with Washington, according to a report last month in the Global Times, which operates under People’s Daily, the Communist Party mouthpiece.