China’s forex reserves hit 11-month high of US$3.1 trillion
It follows strong gains in other leading indicators ahead of party congress next week
China’s foreign exchange reserves hit an 11-month high at the end of September – rising for an eighth straight month – in a fresh sign of economic stability ahead of the Communist Party congress next week.
Forex reserves rose to US$3.1 trillion by the end of last month, up US$17 billion from August, according to the People’s Bank of China, the central bank. The reserves increased by US$10.8 billion in August.
It followed strong gains in other leading indicators – the purchasing managers’ index (PMI) rose to a five-year high last month, according to the statistics bureau, while retailers saw a double-digit increase in sales during the “Golden Week” holiday that ended on Sunday, the commerce ministry said.
Beijing’s success in tackling a depreciating currency and declining forex reserves will mean the new leadership – to be unveiled at the upcoming congress – will be able to turn its attention to deep-rooted structural problems such as the bloated state sector.
China’s forex reserves fell below US$3 trillion in early 2017. But they have steadily recovered over the past eight months, thanks to solid economic growth, a tighter grip on capital outflows and pricing of the yuan to counter depreciation. Some economists now expect Beijing may soon relax controls on outbound payments and individual foreign currency purchases.
“As expectations of the yuan’s one-way depreciation fade, China is set to restart the opening up of the capital account,” Larry Hu, head of Greater China economics at Macquarie Group, said.
At the initial stage, the central bank may take a low-profile approach by quietly speeding up approvals for outbound payments, and mainland investors may then be allowed to buy bonds in Hong Kong through the Bond Connect programme, Hu said.
Several economists with links to the central bank and foreign exchange regulator said in a recent report that while China should open its financial sector wider, “moderate and temporary cross-border capital flow management” was needed to help maintain stability.
“Short-term capital flows are the main reason behind China’s capital exodus,” China Finance 40 Forum economists led by Guan Tao, a former division head of the State Administration of Foreign Exchange, wrote in a report released at the end of last month.
“Enhancing cross-border capital flow management could help safeguard the independence of monetary policy, maintain financial stability, and ease the negative impact on the economy caused by foreign exchange rate fluctuations,” the report said.
China is expected to release its main economic data for September on Thursday next week, and stable economic growth for the third quarter is expected to serve as a ballast to social order as the party congress gets under way.
But while the Chinese government is keen to ensure economic and social stability, an independent PMI reading has come in much lower than the official one.
The Caixin/Markit services PMI fell to 50.6 in September – the lowest reading since December 2015, and one of the weakest since the survey began in 2005. That was in contrast to an official gauge of the non-manufacturing sector that showed it expanded at the fastest clip since 2014 – rising 1.8 points to 54.4 – in September. It also puts the services sector closer to the 50-point mark – below the line indicates contraction, while above means growth.
It could reflect the growth divergence in different sectors of the economy, Goldman Sachs economists led by Maggie Wei wrote in a research note. However, activity growth overall appeared to be solid in September, and China’s gross domestic product was expected to expand 6.9 per cent for the third quarter, they said.