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Forex reserves fall as dollar rallies

June 12,2018

   
   

CHINA’S foreign exchange reserves fell slightly in May to its lowest in seven months as the US dollar rebounded strongly and regulators continued their efforts to increase cross-border use of the yuan.

Reserves fell US$14.23 billion in May to US$3.11 trillion, the lowest level since October, compared with a drop of US$17.97 billion in April, central bank data showed yesterday.

Economists polled by Reuters had expected reserves to drop by US$25 billion to US$3.10 trillion.

The State Administration of Foreign Exchange said the size of China’s foreign exchange reserves should remain stable.

A decline in other currencies versus the US dollar was the main reason for the small decline in the dollar value of the reserves in May, SAFE said in a statement.

The yuan lost 1.2 percent of its value against a surging dollar in May, the second straight month of decline, but it is still up 1.7 percent so far this year.

Capital flight was seen as a major risk for China at the start of 2017, but a combination of tighter capital controls and a faltering dollar helped the yuan stage a strong turnaround, bolstering confidence in the economy.

Last year China’s reserves rose for the first time since 2014 and its cross-border capital flows went from net outflows to basically stable.

But SAFE warned in a recent statement that the cross-border capital flows are facing risks of external shocks from rising trade and investment protectionism. Recent talks between Washington and Beijing appear to have made little progress toward reducing trade tensions.

While a rising dollar this year has put pressure on some emerging market currencies, the yuan should be more resilient as China funds itself using domestic savings and is much less exposed to dollar strength than other economies, Marie Diron, managing director of Moody’s Sovereign Risk Group, said in an interview with Reuters on Tuesday.

“When we’ve seen pressure on the currency before it was related to the change in the currency regime and the uncertainty about how fast the (yuan) would depreciate ... all this seems to have stabilized greatly,” said Diron.

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