China’s foreign reserves grew surprisingly by late June, rising by USD 13.3 billion to USD 3.21 trillion. Assuming that 65 percent of FX reserves of China are denominated in the US dollar and 35 percent in non-USD currencies, the valuation impact should have risen the FX reserves by USD 21.1 billion in June, noted Commerzbank in a research report. However, the country’s FX reserves are mainly due to the valuation impacts.
Meanwhile, China’s FX reserves, in SDR terms, increased SDR 14.9 billion to SDR 2.296 trillion. This is the first time that the nation’s FX reserves rose in both SDR and USD terms. This implies that the outflows of capital from China are alleviating, at least temporarily.
Even if capital outflows from China are slowing because of capital control measures, CNY exchange rates have shown a weakening trend in recent months that has again drawn quite a bit of attention. In the second quarter, the CNY dropped against the USD by 2.75 percent, the highest quarterly decline in history.
The CNY also depreciated 6.5 percent against the currency basket in 2016, while the authorities in China have repeated that the country will keep a “generally stable exchange rate against a basket of currencies”. Against this backdrop, further decline in CNY, particularly against the currency basket, is expected to set off speculations that a rapid depreciation of the CNY is looming on the horizon, according to Commerzbank. This will definitely put additional pressure on the country as huge capital flight will be inevitable.
Even if the stability in FX reserves in recent months implies that the Chinese central bank has lowered the market intervention, the recent movements in both the onshore and offshore markets indicate towards the fact that the CNY continues to be weak.
The CNY fixing mechanism shows that the higher USD/CNY fixing rate is either because of higher closing rate of a stronger US dollar. As US dollar continued to be range-traded in the past few months, higher USD/CNY fixing rates indicates towards increased demand for the US dollar that has pushed up the USD/CNY closing rates, added Commerzbank.
