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August 8, 2017

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Forex reserves at 9-month high as capital flow more balanced

CHINA’S foreign exchange reserves rose in July for the sixth consecutive month and to a nine-month high as cross-border capital flow achieved more balance amid China’s economic recovery and a weak US dollar.

The stockpile rose US$23.9 billion month on month to US$3.08 trillion at the end of July, data from the People’s Bank of China showed yesterday.

The increase, twice what the market expected, marked the longest gaining streak since June 2014.

It compared with June’s increase of US$3.2 billion.

The forex regulator attributed the increase to the more balanced supply and demand of foreign exchange, and higher valuation of non-dollar reserves under a weaker US dollar.

“Since the beginning of the year, China’s economy has extended a steady and improving development trend, and more positive factors are supporting improvement of economic development quality,” the State Administration of Foreign Exchange said in a statement.

“The international financial market was relatively stable, cross-border money flow and supply and demand of foreign exchange were basically balanced, and the yuan exchange rate was basically stable. The behavior of residents and companies was thus more rational.”

The forex watchdog said China’s forex reserves will be further stabilized as the quality of economic development continued to improve amid efforts to deepen supply-side reforms and promote innovation.

Opening up the financial market and the healthy development of the forex market will consolidate the basis for more balanced cross-border capital flow, the statement said.

Official figures showed that China’s second-quarter GDP rose a better-than-expected 6.9 percent year on year, the same pace as the first quarter.

A series of data, including trade, retail sales, industrial output and credit expansion, have pointed to lasting recovery in the world’s second-largest economy.

Organizations, including the International Monetary Fund, JPMorgan, Nomura Securities, Asian Development Bank and Standard Chartered Bank, raised their forecasts of China’s economic growth for the year by 0.1-0.2 percentage points.

Yesterday, the yuan closed at 6.7182 against the US dollar in Shanghai, stronger than the central parity rate of 6.7228, from which the local currency is allowed to rise or fall within 2 percent.

The yuan has strengthened 0.8 percent in the past month and 3.4 percent so far this year against the US dollar.

But against a basket of currencies of China’s major trade partners, it weakened 0.58 percent in July from a month earlier, the China Foreign Exchange Trade System index showed.

Economists said that the increase of forex reserves was partly the result of authorities’ increased monitoring of capital outflow and that room for further yuan appreciation against the dollar was limited in the near term.

“The yuan’s recent strengthening is largely the result of a weak US dollar in recent months as economic recovery in Europe lifted the euro,” said Lian Ping, chief economist at Bank of Communications.

“The US dollar has nearly bottomed and the greenback may strengthen in the fourth quarter along with the Federal Reserve’s expected interest rate hike and balance sheet shrinking.”

Iris Pang, ING’s China economist, said that the central bank may wait to confirm that the stronger yuan has prevented net capital outflows, and that the current pace of appreciation will not be sustained in August.

“Current intensive actions from different regulators on looking at details of mega cross-border deals send strong signal that corporates need to be more selective on overseas investment targets,” Pang said.

“Investments in line with the central government’s reform direction are likely to get a pass more easily than other projects.”

The bank expects the yuan to reach 6.72 per US dollar by the end of the year.


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