China fine-tuning foreign exchange reserves amid global uncertainty

China is working to maximize investment returns of its foreign exchange reserves amid global economic downside risks, focus more on maintaining sufficient reserves and increase gold purchases to prevent market shocks, said officials and analysts.

The country’s total forex reserves continued to rise in January to a five-month high of nearly $3.09 trillion, supported by improved investment management and balanced international payments, the State Administration of Foreign Exchange said on Monday.

Forex reserves increased by $15.2 billion last month compared to December 2018.

They were down by $67.24 billion in full-year 2018.

The People’s Bank of China, the central bank, also joined several central banks last month in accelerating gold buying, which hit its highest level in a year, by value, at $79.32 billion, or 59.94 million troy ounces in terms of volume, according to official data. Analysts said the move is to limit risks of currency and equity fluctuations.

When yields of targeted investment bonds fluctuate, China’s monetary authority can readjust the portfolio of reserve assets over the short term to maintain sound return rates, said Mu Dan, a researcher at Bank of China.

“But foreign exchange reserve management is relatively stable and for the long term,” Mu said. “If the target currency (the United States dollar) can avoid aggressive depreciation, exchange rate volatility will have limited influence on the portfolio.”

Wang Chunying, a SAFE spokeswoman, expressed confidence in generally stable foreign exchange reserves over the coming months, although she said fluctuations are possible, according to a SAFE statement on Monday.

China enhanced management over foreign exchange reserves last year through tightening control over default risks in asset investments and maintaining liquidity, said Pan Gongsheng, SAFE’s director and also a PBOC deputy governor.

“The measures we took have ensured the safety of foreign exchange reserves and sustained the balance of international payments,” said Pan, who highlighted that management was based on market-oriented rules instead of administrative measures.

In order to hedge against investment risks, SAFE decreased its holdings of US Treasury bonds by a total of $61.7 billion for six straight months since June 2018, with the total falling to $1.12 trillion by November — a record low since May 2017 — according to a report from the US Department of the Treasury.

Given weakening economic confidence, yields on 10-year US treasuries fell 2.37 percent last month, marking the third consecutive monthly drop. That performance was the worst since the summer in 2015. US treasuries make up a large proportion in China’s foreign exchange reserves.

Bowing to fears of a global economic slowdown, the US Federal Reserve in January indicated greater willingness to be patient about any new interest rate hike after nine hikes since 2015. The signal has further pushed two- and five-year US treasury yields to their lowest levels since mid-January.

Central banks, especially in emerging countries, were keen to boost forex reserves after the 2008 global financial crisis in order to maintain strong capability to intervene in support of their national currencies as well as limit external vulnerabilities.

Total foreign exchange holdings globally increased to $11.48 trillion by the end of June 2018, compared with $8.42 trillion eight years ago. As of October last year, China accounted for 26 percent of the global amount, followed by Japan’s 10 percent and Switzerland’s 6 percent, said the International Monetary Fund.