China’s foreign reserves edged lower last month, as a rise in US bond yields led to declines in the pricing of key sovereign debt.
Official data released by the People’s Bank of China (PBOC) on 7 October indicates that China’s foreign reserves were USD$3.087 trillion as of the end of September, for a decline of $22.7 billion compared to the end of August, or a reduction of 0.7%.
“Valuation changes were the key factor behind the decline in foreign reserves in September, said Guan Tao (管涛), a senior researcher with the China Finance 40 Forum to state media, who pointed in particular to the US Fed’s September rate hike and a rise in yields for US debt.
This led to a decline in the prices of key sovereign bonds held by Beijing, and an ensuing dip in foreign reserves.
Wang Chunying (王春英), a spokesperson for the State Administration of Foreign Exchange (SAFE) said that the US Dollar Index remained stable overall in September, while key non-US dollar exchange rates saw both gains and declines.
The overall effect of factors such as shifts in exchange rates and asset prices was a modest decline in China’s foreign reserves.
“In September China’s forex market remained stable overall, and the foreign transactions of market actors were comparably rational and orderly,” said Wang.
Following the implementation of a third rate hike in 2018 by the US Fed at the end of September, the Chinese central bank announced on 7 October that it would launch a fourth cut to the required reserve ratio for the year.
The 100 basis point cut effective from 15 October is expected to unleash 1.2 trillion yuan in liquidity, for a net injection of 750 billion yuan (USD$109.2 billion) given that it coincides with the maturation of 450 billion yuan in medium-term lending facilities (MLF).
On 20 September PBOC executed a memorandum of cooperation with the Hong Kong Monetary Authority, which will enable it to issue central bank notes to adjust offshore renminbi liquidity and raise costs for short-sellers.
“In future China’s cross-border capital flows and foreign reserves are expected to remain stable,” said E Yongjian (鄂永健), an analyst from the Bank of Communications.