Dollar Appreciation Wipes Out China Reserve Growth in June

Chinese reserves increased by $1.5 billion in June. The rise bucked the move in the U.S. Dollar Index and the dip in the yuan. Reserves rose $2 billion in June 2017. Yuan depreciation expectations have not set in, thus a large move in reserves would have been a surprise.

The larger story is how much dollar appreciation impacted Chinese reserves. Measured in SDRs, reserves increased $16.8 billion. In other words, 88 percent of reserve accumulation in June was eliminated by dollar appreciation. Even if China can stop outflows, it cannot prevent reserve depreciation amid a U.S. dollar rally unless inflows offset the depreciation of non-USD reserve assets.