China’s Forex Reserves Rose in August as U.S. Dollar Weakened
China’s foreign-exchange reserves rose last month, boosted by a valuation gain from a weaker U.S. dollar amid prospects for rate cuts by the U.S. Federal Reserve.
Data released Saturday by the People’s Bank of China showed that the FX reserves rose by $31.8 billion last month to $3.288 trillion at the end of August, marking a second monthly gain for the world’s largest hoard of foreign exchanges and hitting the highest level since December 2015. That undershot the $3.298 trillion expected by economists in a Wall Street Journal poll.
The U.S. Dollar Index fell and global financial asset prices rose in August thanks to factors including macroeconomic data and monetary-policy expectations in major economies, China’s foreign-exchange regulator said in a statement on Saturday. Due to the combined effects of changes in exchange rate and asset price, the scale of China’s foreign-exchange reserves increased that month, the regulator said.
Against the backdrop of a weaker dollar, the Chinese yuan’s strong performance since late July has stoked fears that Chinese exporters might rush to unload their huge stockpile of dollars for the Chinese currency, a move that economists say could result in wild swings in the foreign exchange market and aid the yuan’s further appreciation against the greenback.
The Chinese yuan gained 1.9% against the dollar in August, marking its biggest monthly rise since November. USD/CNY has fallen below the key 7.10 threshold in recent days, reaching year-to-date lows.
While calculations vary, economists widely expect Chinese exporters to have amassed hundreds of billions of dollars since 2022 amid booming Chinese exports and rate hikes in the U.S. Some analysts say concerns of massive dollar unloading are overblown, shrugging off the possibility of a “tsunami” of dollar sales in the near term given the still-large U.S.-China interest-rate gap and China’s muted economic growth.
“The higher volatility of USD/CNY in the near term reflects greater uncertainty around Fed views and the U.S. election, which may discourage CNY shorts despite the still-elevated carry return,” said economists at Goldman Sachs in a recent note. While carry unwinds and potential USD selling by exporters could potentially lead to an overshoot in CNY strength in the short term, Goldman Sachs’s economists expect the Chinese currency to underperform currencies of major trading partners over the medium term, due to weak fundamentals and still-downbeat sentiment in China.
While the Fed’s soon-to-start easing circle is set to offer China more policy rooms, economists say Chinese authorities have little appetite for an overly strengthened yuan which could bite exports, a key growth driver for the world’s second-largest economy this year amid faltering domestic demand.
“Chinese policymakers are likely to allow for more CNY depreciation, in the event of significant tariff hikes and escalated trade tensions,” said economists at Goldman Sachs.
Meanwhile, Saturday’s data shows China’s central bank also paused its purchase of bullion for the fourth straight month in August, with an unchanged holding of 72.8 million troy ounces at the end of last month. The PBOC in May put an end to its 18-month buying spree that had helped boost the strength in bullion. The precious metal’s price hit a record high during the summer amid rising bets on monetary easing from the Federal Reserve and persisting haven demand driven by geopolitical tensions and economic uncertainties, with global central banks among some of the most enthusiastic buyers.