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Wednesday, November 9, 2016, 09:49

China FX reserves wane on strong dollar

By Xinhua

BEIJING - The fourth consecutive monthly decline in China's foreign exchange reserves is not as worrisome as it appears, as a stronger dollar accounts for much of the change, with Chinese companies and households embracing a longer list of investment channels overseas .

The fourth consecutive monthly decline in China's foreign exchange reserves is not as worrisome as it appears


The world's largest currency hoard fell to US$3.12 trillion as of the end of October, down US$45.7 billion from a month earlier, marking the lowest level since March 2011, according to data from the People's Bank of China, the nation's central bank.

This represented the largest monthly decline since January, triggering market worries, but analysts said the strengthening of the dollar was the primary reason behind this, as forex reserves such as the euro translate into smaller figures when denominated in stronger dollars.

China's forex reserves are composed of assets in various currencies, although the exact structure of this basket is unknown. The depreciation of non-dollar assets is expected to account for about US$29 billion of the forex reserve decrease, said Xie Yaxuan, a senior economist with China Merchants Securities.

This means that the capital outflow last month led to less than US$17 billion of the decline in the world's largest forex reserve stockpile, easing the pace from US$18.8-billion-drop registered in September, Xie added.

His analysis was supported by other economists. Han Huishi, a veteran foreign exchange analyst, predicted that valuation effects caused by a stronger dollar accounted for about US$30 billion of the US$45.7 billion-contraction in October.

The dollar index, which measures the dollar against six major currencies, including the euro and sterling, advanced by about 3 percent last month to 98.35 on Oct 31 on the back of a string of positive economic data from the world's largest economy, which strengthened the rationale for an interest rate spike by the US Federal Reserve.

The recent depreciation of major currencies against the dollar was a more "passive" market response to US interest rate hike expectations in December, and does not point to weaknesses in China's economic fundamentals, said Chen Ying, a senior analyst at CITIC Securities.

Despite difficulties in transitioning to a more consumption- and innovation-driven economy, China's GDP grew 6.7 percent in the third quarter, holding steady with the first and second quarters and outpacing many major economies.

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