China’s foreign exchange reserves in unexpected June rise despite trade threats and yuan’s worst month on record

Reserves up $1.51 billion, after a drop of $14.23 billion in May, even against backdrop of escalating tensions with the US

PUBLISHED : Monday, 09 July, 2018, 12:07pm
UPDATED : Monday, 09 July, 2018, 10:48pm

China’s foreign exchange reserves unexpectedly rose in June, driven by changes in the value of its holdings and even as concerns of a full-blown trade war between Beijing and Washington rattled markets.

Reserves rose $1.51 billion in June to $3.112 trillion, compared with a drop of $14.23 billion in May, central bank data showed on Monday.

Economists polled by Reuters had expected reserves to drop by $10.6 billion to $3.10 trillion.

The small increase in reserves was due to asset price changes, the State Administration of Foreign Exchange (SAFE) said in a statement.

The Chinese currency and equity markets had been on edge ahead of last Friday, when US tariffs on $34 billion worth of Chinese goods kicked in. Beijing has retaliated with tariffs on US products of the same value.

China’s foreign exchange reserves dip on US dollar rebound

The heightened Sino-US trade tensions have sparked concerns of capital outflows from China and threatened to pile more pressure on the Chinese currency.

In June, the yuan suffered its worst month on record, falling 3.25 per cent against the US dollar. June also represented the worst month for Chinese stocks in more than two years.

Capital flight was seen as a major risk for China at the start of 2017, but a combination of tighter capital controls and a faltering dollar helped the yuan stage a strong turnaround, bolstering confidence in the economy.

Yuan weakens further despite efforts by People’s Bank of China to stabilise exchange rate

Last year, the yuan reversed three straight years of depreciation against the US dollar and China’s cross-border capital flows went from net outflows to basically stable.

The yuan fell through a key psychological level of 6.7 on the US dollar last Tuesday. The Chinese authorities made remarks the same day to assure markets it would keep the currency stable.

China’s forex regulator said in the commentary on Friday it expects the country’s foreign exchange reserves to remain stable, despite rising trade protectionism and Federal Reserve interest rate increases.

Despite the market tumult in the past week, China appears broadly comfortable with a weakening yuan and would intervene only to prevent any destabilising declines or to restore market confidence, policy insiders told Reuters.

Authorities are also confident they will not have to make heavy use of the official foreign exchange reserves to defend the yuan as they did during 2015 when stocks and the currency went into a tailspin.

The value of China’s gold reserves fell to $74.071 billion at the end of June, from $77.323 billion at the end of May.