China’s forex reserves grew marginally in 2020, despite near-record trade surplus. Where did the money go?

Name: China’s economy accelerated at end of 2020, but virus-hit annual growth lowest in 45 years
Uploaded: 2021-02-03T12:00:12.000Z
Duration: 1 min 33 s
Description: China’s economy accelerated at end of 2020, but virus-hit annual growth lowest in 45 years

China’s foreign exchange reserves rose by only US$108 billion last year, despite a large trade surplus

The gap reflects money being allowed to flow out of China as Beijing tempers excessive yuan appreciation

4-MIN READ4-MIN

China’s foreign exchange reserves rose by only US$108 billion last year, despite a large trade surplus. Photo: AFP

Karen Yeung

Published: 8:00pm, 3 Feb 2021Updated: 10:04am, 4 Feb 2021

Coronavirus disruptions around the world fuelled strong demand for Chinese goods last year, resulting in a massive trade surplus. Meanwhile, the nation’s rapid recovery from the pandemic and China’s buoyant stock and bond markets have sucked in large amounts of foreign investment.

But China’s massive US$535 billion trade surplus and capital inflows did not result in a jump in the nation’s foreign exchange reserves, as they have in the past.

So where did the money go?

Foreign exchange reserves rose by only US$108 billion last year, according to the People’s Bank of China (PBOC), despite the trade surplus being the second-largest on record and the highest since 2015.

01:33

China’s economy accelerated at end of 2020, but virus-hit annual growth lowest in 45 years

Accounting for US dollar inflows from foreign investment, foreign borrowing and negative services trade, China is estimated to have absorbed about US$490 billion last year.

In the past, Beijing has relied heavily on foreign exchange intervention to manage the yuan exchange rate. Chinese exporters typically sold the US dollar-denominated receipts earned from selling products abroad to the four large state-owned commercial banks – Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China.

The PBOC would then purchase those US dollars in the interbank market from the Chinese lenders, turning them into central bank reserves. In exchange, the PBOC would sell yuan to the banks, who would then sell the yuan back to their customers.