China's FX Reserves Micro Decline in Dollars and SDRs

Chinese reserves were largely steady in August, impressive relative to the chaos seen across many emerging markets. The U.S. Dollar Reserve's dipped by 0.3 percent. Reserves held up well given the U.S. Dollar Index increased 0.9 percent. Reserves also fell in SDR by $364 million. Reserves valued in SDRs fell in January, February and March, but then rose every month until August.

21st Century: 8月外汇储备微降 外汇供求延续基本平衡
Lian Ping, chief economist of the Bank of Communications, believes that in the context of the two-way volatility and expected differentiation of the RMB exchange rate, the foreign-invested behaviors of enterprises and individuals gradually shift from unilateral to diversified, and they also arrange cross-border revenue and expenditure according to actual needs. In the sale of foreign exchange, the supply and demand of the foreign exchange market tends to be basically balanced.

In terms of capital outflows, 21st Century Business Herald interviewed a number of foreign exchange managers in the banking industry to understand that, in July and August, the profits of foreign-funded enterprises were remitted, the dividends paid by overseas companies, and the dividends paid by banks themselves. During the period, the demand for foreign exchange purchases related to investment income will increase; second, the demand for foreign exchange for overseas travel and study abroad will also increase during the summer vacation; third, imports continue to grow and demand for foreign exchange purchases increases.

In terms of capital inflows, as the current account surplus continues to shrink, capital and financial accounts have gradually become the main force for balance of payments and stability of foreign exchange reserves. The latest data released by the foreign exchange bureau shows that in the second quarter of 2018, the non-reserve financial account surplus $18.2 billion, continuing the net inflow trend.

A number of foreign-funded institutions responsible for business told the 21st Century Business Herald that Sino-US trade friction and the volatility of the RMB exchange rate are increasing, which will directly affect the willingness of foreign capital to continue to flow in the financial sector. “Exchange rate risk is an important consideration in international investment. If the forward exchange rate is expected to fall, on the one hand, the hedging cost will increase, and on the other hand, the risk of income uncertainty will increase, and the investment will naturally be adjusted,” said a private equity investment manager in Hong Kong.

In addition, for the current account, Xie Yaxuan, chief macro analyst of China Merchants Securities, believes that from the perspective of stable savings rate and the seasonal peak season of goods trade, the current account balance in 2018 is expected to improve quarter by quarter, which will bring more foreign exchange. Inflow.

“Generally, the fourth quarter is the time when exports are the most, mainly due to Western Thanksgiving, Christmas, etc., and some of the purchases in the first half of the year will be superimposed in the second half of the year.” A person in charge of a textile company in Zhejiang told the 21st Century Economic News Reporter, "Although the exchange rate will affect the company's mentality of foreign exchange, we generally insist on exchange rate neutral batches, and the current exchange rate is better for us than the first half."

It is also worth noting that China's foreign debt level has continued to rise since 2017. According to the latest data released by the SAFE, as of the end of March 2018, the total external debt position increased to 1,843.5 billion US dollars, an increase of 132.9 billion US dollars from the end of 2017. It has reached a historically high level, and some companies' overseas bond issuance has grown rapidly, which will have an impact on foreign exchange balance and the RMB exchange rate in the next 1-3 years.

“An important reason for the decline in China’s foreign exchange reserves between 2015 and 2016 is that in 2013 and 2014, Chinese companies borrowed a large amount of foreign debts. During the period of repayment of foreign debts, the US dollar suffered a stronger US dollar, which led to a decrease in foreign exchange reserves, capital outflows and exchange rate declines.” An analyst at a foreign bank in Beijing said: "At present, the level of foreign debt of Chinese companies has actually been comparable to that of 2014. It is also extremely sensitive to exchange rates and needs to pay attention to this risk."

Bloomberg: China Reserves Steady as Yuan Declines Fail to Trigger Outflows
Reserves declined by $8.2 billion to $3.110 trillion in August, the People’s Bank of China said Friday. That compares with $3.118 trillion the previous month and the median forecast of $3.115 trillion in a Bloomberg survey of economists.

The nation’s reserve holdings, the world’s biggest, have shown small fluctuations in value this year as capital control measures remain in place and the PBOC refrains from direct intervention on the yuan. In August, the PBOC used multiple policy tools to support the currency and stabilize market sentiment, implementing a reserve requirement on foreign exchange forward trading and a counter-cyclical factor in the daily pricing of the currency.

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