Rise comes on back of balance in supply and weak green back
The Chinese mainland’s foreign exchange reserves rose in June for a fifth straight month, as tightened supervision of outbound investment and a weak dollar helped curb capital outflows.
The nation’s foreign exchange stockpile climbed to $3.056 trillion in June, up by around 0.11 percent from the previous month, according to data released by the State Administration of Foreign Exchange on Friday.
The currency regulator attributed the continued positive trend in the data to basically balanced foreign exchange supply and demand and the appreciation of a basket of currencies against the dollar.
Economists on Friday said that supported by strong economic fundamentals and the government’s efforts to open up the domestic capital market, the reserves are likely to rise slightly in the coming months, while remaining largely stable.
Guan Tao, former director of the international payments department at China’s State Administration of Foreign Exchange, said during a conference on the renminbi in late June that forex reserves appeared to have stabilized, mainly supported by eased capital outflow pressures in recent months.
Aside from the forex reserves fall in January to $2.998 trillion — the first since March 2011 — reserves have risen by around 1.5 percent as of June, compared with the start of the year, the currency regulator said.
Guan said the government’s enhanced supervision of outbound investment had gradually taken effect to help curb capital outflow pressures.
From December 2016, the government introduced a slew of measures tightening screening of overseas investment projects — amid concern about capital outflows and market expectations for a continued depreciation of the yuan.
Analysts say that after the yuan exchange rate against the dollar hit a six-year low
counts dollar cash at a bank in Taiyuan, capital of Shanxi province.
PBOC to let market forces shape rates
The People’s Bank of China, the central bank, said late on Thursday that the country will allow the market to “play a bigger role in deciding the exchange rate of the yuan and increase the currency’s resilience against the dollar”.
Analysts said that the yuan will become more flexible against the dollar, although it is expected to remain largely stable.
The central bank expressed its views through its Shanghai Head Office, which published the China Financial Market Development Report 2016 on its website.
The report said, “Efforts will be made to actively guide and stabilize market expectations, balance cross-border capital flows, and keep the yuan’s exchange rate basically stable at a reasonable and balanced level.”
Given the still-big interest rate gap between China and the US, and China’s recent tightening of cross-border capital management measures, the country is facing less pressure from capital outflows; and the yuan is expected to be largely stable in the second half of this year, said a Sinolink Securities report.
But analysts said since the central bank has introduced the “counter-cyclical adjustment factor” in setting the reference central parity rate of the yuan against the dollar in late May, the yuan’s exchange rate against the greenback is set to become more flexible.
“The central bank report on Thursday, which said market forces will have more say in deciding the exchange rate of the yuan, shows that the currency may undergo bigger fluctuations following major changes in the value of the dollar in the future,” said Liu Dongliang, currency analyst of China Merchants Securities.
The dollar appreciated sharply in the second half of last year, leading to big depreciation of other currencies. But the yuan had remained relatively strong, failing to reflect the changes in the value of the dollar. “The yuan may become more responsive to changes in the dollar,” Liu said.
The central bank also said in its report that the financial market will focus on market-oriented reforms this year. Mechanisms for formation, regulation and transmission of market-oriented interest rates will be improved to enhance the central bank’s regulatory purview of interest rates, the report said.
The country will raise the efficiency of the central bank operations, including standing lending facility, medium-term lending facility and reverse repos, it said.