China’s foreign currency treasury has not been so large for more than five years

China’s foreign exchange reserves hit their highest level in more than five years at the end of July, driven by stronger non-US dollar currencies, official data showed.

Reserves reached $ 3,236 billion at the end of last month, up $ 21.9 billion from the end of June and marking the highest level since December 2015, data the State Administration of Foreign Exchange (SAFE) showed on Saturday. The reading topped market forecast by $ 3.228 billion, according to a research note released by UBS Group AG on Monday.

The increase was affected by changes in exchange rates and asset prices, according to a SECURE Q&A statement (link in Chinese) posted on Saturday. China’s foreign exchange reserves are denominated in dollars. As currencies other than the U.S. dollar strengthened, China’s holdings of those currencies appreciated after converting them to dollars, the statement said.

The Dollar Index, which measures the dollar’s value against a basket of six other major currencies, closed at 92.17 on July 30, down 0.3% from the end of the previous month.

China’s strong business performance and inflows of foreign capital have also helped increase its foreign exchange reserves, said Wen Bin, chief analyst at China Minsheng Banking Corp. Ltd. (600016.SH). In July, Chinese product exports increased by 19.3% year-on-year in dollars, exceeding the median forecast of an 18.4% increase by economists polled by Caixin.

Wen said yuan-denominated assets are still attractive to global investors and are expected to attract new inflows of foreign capital, which may support China’s foreign exchange reserves.

China’s sovereign credit risk remains relatively low as the economy has recovered faster than many other countries amid a stable epidemic, said Wang Chunying, spokesperson for SAFE. said at a press conference on July 23 (link in Chinese). In addition, government bonds in China have higher yields than in many other countries that have loosened monetary policies. It can also help attract foreign capital inflows, she said.

China’s total external debt stock stood at $ 2.5 trillion at the end of March, up 5% from the end of last year. This is mainly because foreign investors have increased their holdings of onshore bonds, Wang said.

Nevertheless, the US Federal Reserve has announced its intention to reduce its balance sheet, raising fears that such a tightening of monetary policy could strengthen the dollar and cause massive capital outflows from emerging economies, including China.

In response, Wang said that the impact of future Fed policy adjustments on China’s cross-border capital flows is “generally controllable” because the Chinese economy is healthy and stable enough to withstand external impacts.

Contact reporter Tang Ziyi ([email protected])

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