China’s FX reserves rise in December, to be cautious in allowing faster build up in reserves in future

The data for Chinese FX reserves for the month of December was released on Sunday. It showed that the FX reserves rose USD 20.6 billion to USD 3.14 trillion. This was the 11th straight monthly rise and shows the stable turnaround in fortunes through 2017. FX reserves rose USD 129 billion last year after falling slightly below USD 3 trillion in January 2017 and after dropping for the last two years by more than USD 800 billion. The State Administration of Foreign Exchange noted valuation effects aided the rise, which is the increase in value of non-USD currencies in December, noted Commerzbank in a research report.

However, the larger picture is one of the continued stabilization in capital outflows because of tighter capital controls. The rate of increase was marked. There were just three other months where reserves rose more than USD 20 billion in 2017.

“Looking ahead, China may be cautious in allowing a faster build up in reserves in order to avoid coming under the US Treasury’s radar of being labeled as a currency manipulator”, stated Commerzbank.

During this stage, there is little risk of this as one of the three criteria need for a nation to be labeled as a currency manipulator is excessive FX intervention that results in a rise in FX reserves of more than 2 percent of GDP over a 12-month period. In case of China, with nominal GDP of just below USD 12 trillion, this works out to be about USD 240 billion and the rise in 2017 was much below this. Moreover, PBOC has permitted the Chinese yuan to continue to strengthen.

At 12:00 GMT the FxWirePro's Hourly Strength Index of Chinese yuan was slightly bearish at -59.3508, while the FxWirePro's Hourly Strength Index of US Dollar was bullish at 89.3087. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

FxWirePro launches Absolute Return Managed Program. For more details, visit http://www.fxwirepro.com/invest