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China’s Foreign Exchange Reserves Rises For Third Straight Month

For the third consecutive month China’s foreign exchange reserves have seen an increase, beating market expectations. The reserves climbed by $21 billion in April reaching $3.03 trillion, as compared to the rise of $3.96 billion in March.

The country’s regulatory body, the State Administration of Foreign Exchange (SAFE) attributed the jump to balanced supply and demand in foreign exchange and to the currency appreciating against the dollar. According to Yan Ling, an analyst with China Merchants Securities, U.S. bonds alone helped boost the reserves by $18.4 billion.

The sustained growth in reserves is likely to reassure the market and help China’s leadership to address structural issues in the economy with more focus. Yan said that the U.S. dollar index was expected to remain weak which was a positive sign for the yuan exchange rate. Bank of Communications analyst Liu Jian noted that the fall in the U.S. dollar index along with a more stabilized economy in China would ease further falls in the value of yuan and reduce capital flows.


In a statement, Liu Jian said,

Capital outflows will become more challenging in the second half when the uncertainties of China’s economic growth increase and the US Federal Reserve continues to raise interest rates. However, it’s basically controllable.

Chinese authorities imposed a range of restrictions on capital movement to stem the capital flight triggered by fears of a slowdown in China and the U.S. Federal Reserve decision to hike interest rates. The government also increased scrutiny of overseas investments and tightened rules for individual purchase of foreign exchange even as the reserves dipped below the psychological mark of $3 trillion in January.

The recent strengthening of the Chinese economy with exports growing 8.2 per cent year on year in the first quarter however helped ease the pressure. Additionally, the uncertainty around U.S. policymaking along with a recovery in the euro zone has resulted in the U.S. dollar index reaching a six month low.

SAFE chief Pan Gongsheng has acknowledged the improved position in a recent note hinting that China’s new policy of opening up its economy would be continued. He said that China needed to reach the right pace and process for opening up capital investments by examining both internal and external factors.

However the interest rate hike by Fed Reserve anticipated in the next few months could force the Chinese authorities to increase rates as well. Guotai Junan Securities analyst Wei Feng said that the central bank, the People’s Bank of China may hike interbank rates by 25-30 basis points which would have an impact on the domestic economy.

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