China’s forex reserves reached US$3.05 trillion at the end of May, up US$24 billion from a month earlier. Photo: Reuters

China’s forex reserves hit a seven-month high

Curbs on capital outflows and weaker US dollar sees reserves increase for a fourth straight month

China’s foreign exchange reserves jumped to a seven-month high at the end of May on curbed capital outflows and a weakened US dollar, giving Beijing ammunition to defend the yuan.

The reserves hit US$3.05 trillion at the end of May, up US$24 billion from a month earlier, the People’s Bank of China said on Wednesday. It was the fourth straight month they increased.

“China’s capital control measures have proven to be very effective,” said Zhou Hao, chief emerging markets economist at Commerzbank. “The authorities apparently hope to stabilise the foreign exchange market to help with the domestic agenda.”

The country tightened vetting of outbound direct investments and hard currency purchases by individuals at the end of last year, when its reserves fell below the US$3 trillion mark and the yuan weakened.

But Beijing hasn’t shown much willingness to relax capital account controls. The State Administration of Foreign Exchange now wants all overseas cash withdrawals and all transactions over 1,000 yuan (US$145) made abroad with a Chinese bank card to be reported from September.

Meanwhile the US dollar has weakened to its lowest level since Donald Trump won the US presidential election in November – a factor that could boost valuations of China’s euro and yen assets.

The size of the world’s biggest stockpile of forex currencies is expected to stabilise demand for US treasuries. Beijing is considering boosting its holding of US government bonds, Bloomberg reported, citing unidentified sources.

It is also intervening more aggressively in the yuan exchange rate and the foreign exchange market. Beijing has squeezed market liquidity in the offshore yuan market in Hong Kong and pushed the yuan to a seven-month high against the dollar. And it added a “countercyclical” factor to fix the daily yuan mid-point price, a tool that will give authorities a bigger role in deciding the currency’s value.

Meanwhile the offshore yuan market continues to shrink. Standard Chartered’s Renminbi Globalisation Index, which measures yuan activities across key offshore centres, fell by 5.2 per cent month-on-month to 1,678 in April as turnover continued to plunge.

But for Beijing, the priority is to convince the market that it can control the yuan, especially after Moody’s Investors Service downgraded China’s sovereign rating last month.

“It is set to reinforce appreciation expectations,” said Liu Jian, a senior analyst with the Bank of Communications in Shanghai.

This article appeared in the South China Morning Post print edition as: Forex reserves hit seven-month high