Chinese FX Reserves Rising As Capital Curbs Help Boost Stockpile

China has seen its foreign exchange reserves rise to its highest amount in over a year based on data published for December 2017. This marked the 11th straight month of increase in China’s foreign exchange. The country’s forex reserve climbed $20.7 billion in December, making the full year increase reach an impressive $129 billion. This marks the first annual rise for the Chinese currency since 2014.

A Bloomberg survey had pegged China’s foreign exchange reserves to hit the $3.13 million median but China has done a lot better and hit $3.14 trillion based on a statement issued by the People’s Bank of China, which is the central bank.

This positive trend in forex reserves is being attributed to stringent regulations, control of capital outflows, a recovery of the yuan and better overall economic conditions in China.

China’s forex reserves hit a block at the start of 2017 when it fell below $3 trillion for the first time in almost six years. The drop was believed to be caused by the central bank propping up the yuan. Since Jan 2017, the Chinese currency made a strong push throughout the year and that push is expected to continue throughout 2018.

The State Administration of Foreign Exchange (SAFE) which is the currency regulator in China stated that there were gains in the value of non-dollar currencies which was another major reason behind the yuan’s increase in value. SAFE also said the better economic conditions in the country had helped boost cross border capital flows in 2017. Moving forward, SAFE has predicted that the reserves, and the balance of payments would be stable.

However there has been a call for caution and financial analysts believe that Beijing’s top priority going forward should be on managing economic risks. The continuing strength of the yuan does have some experts worried. Ding Shuang, chief China economist at Standard Chartered Plc in Hong Kong states that most do not expect the December increase to be sustained. Shuang believes that a rapid accumulation of reserves could end up causing trade frictions or even begin a trade war.

Shuang does point out that if the dollar does keep getting weaker against the yuan, it may cause China’s central bank to relax a small portion of capital. There are also signs that China’s central bank could relax the limit of foreign capital outflow and increase the $50,000 threshold limit with regards to how much foreign currency Chinese can convert each year.

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