China’s forex reserves, yuan on the up but slower growth ‘may lie ahead’

Former official warns currency’s rise in recent months may have been too fast

PUBLISHED : Thursday, 07 September, 2017, 6:01pm
UPDATED : Thursday, 07 September, 2017, 10:25pm

China’s foreign exchange reserves rose to a 10-month high at the end of August, suggesting Beijing has regained its grip on capital outflows.

The central bank released the August total of US$3.09 trillion on Thursday just hours after the onshore yuan exchange rate to the US dollar went below 6.5 in the afternoon trading session, the Chinese currency’s strongest level since May last year.

Beijing has been battling for nearly two years to defend the currency, which weakened to test seven against the US dollar late last year, and to preserve its forex reserves, which dropped below US$3 trillion in early 2017.

The yuan has quickly regained value and the reserves have steadily recovered this year, prompting speculation that Beijing will soon relax its controls of outbound payments and individual purchases of foreign currency.

At a forum in Beijing on Thursday, Guan Tao, a former State Administration and Foreign Exchange (SAFE) official and now an independent researcher, said the strengthening of the yuan in recent months might have been too fast.

China to maintain tight rein on capital outflows despite gains in forex reserves

“A major risk [for the yuan] is that the US Federal Reserve will start to reduce its balance sheet,” Guan said, adding that China’s economic growth could slow in the third quarter.

Beijing has sought to safeguard the yuan and the national forex reserves with a series of measures that marked a clear departure from liberalisation. These included draconian controls over outbound payments and remittances and the adoption of a murky “countercyclical” factor in setting the daily central parity price of the yuan.

If measured by Special Drawing Rights, the International Monetary Fund’s accounting unit, China’s forex reserves fell slightly in August.

SAFE, which is in charge of the day-to-day management of the reserves, said the increase was mainly due to the “appreciation of portfolio assets”.

It also said China was seeing “basically balanced” capital flows thanks to the country’s strong economic performance.

China’s forex reserves hit a seven-month high

Independent economist Andy Xie said there was limited room for further yuan appreciation.

“The recent yuan appreciation might be a result of government guidance as the government is paving the way for future yuan regime reforms,” Xie said.

Earlier this week, China International Capital Corp economists led by Liang Hong said that with the yuan’s value and the reserves within safe limits, China might loosen its restrictions on individual foreign currency purchases in the coming months.

China might also have net capital inflows in the years ahead, a factor that could lead to “revaluation” of onshore assets, the CICC economists said.