China’s Foreign Reserves Rise for Seventh Consecutive Month in August

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The latest data from the central bank shows that China’s foreign reserves continued to increase last month, with analysts pointing to capital inflows and exchange rate changes making key contributions.

Data released by the People’s Bank of China indicates that as of the end of August China’s foreign reserve balance was USD$3.091527 trillion, for an increase of $10.807 billion compared to the preceding month.

The increase for August marks the first time in over three years that China’s foreign reserves have seen a run of consecutive increases extending for seven months.

The August month-on-month increase of $10.807 billion nonetheless marked a diminution of growth compared to July, whose month-on-month rise was $23.9 billion.

Liu Jian, senior researcher with the Bank of Communications financial research centre, said to National Business Daily that while in recent several months the increase in foreign reserves has chiefly been due to exchange rate effects and the appreciation of non-US dollar assets, August could mark the first month that capital inflows have made a positive contribution.

The US dollar index edged lower 0.3% in August, which in Liu’s opinion could only have had a limited impact upon China’s foreign reserves. US dollar, euro and yen-denominated sovereign bonds all saw yields falter, leading to a $5 – 8 billion rise in the value of debt assets.

The Chinese yuan breached the 6.7 threshold against the US dollar in August, which Liu says may have changed renminbi bears into bulls, and spurred capital inflows that expanded foreign reserves by $3 – 5 billion.

Deng Haiqing, chief economist at Jiuzhou Securities, expects foreign reserves to continue to increase following accelerated trade and cooperation between BRIC nations, which will serve to abet the internationalisation of the yuan.

According to Deng divisions within the Trump administration, a peak in the revival of the US economy as well as the recovery of the European economy will drive further weakness in the US dollar index.

In tandem with this the Chinese economy is expected to gradually settle into an L-shaped growth pattern in the second half, which will ameliorate asset bubble risks, and further drive the strong performance of the renminbi.

BoCom’s Liu Jian expects appreciation of the Chinese yuan to continue or even strengthen following its breach of key thresholds, as the US dollar index continues to falter.

 

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