China Foreign Exchange Reserve Rises After 5 Months of Consecutive Decline

Written by Yuhua Zhang, GEI Associate

Based on the most recent statistics from China State Administration of Foreign Exchange, China foreign exchange reserve produced a slight increase by $11.387 billion to the total of $3,514.120 billion in October. Since it is only the third increase since last June, after consecutive decline of five months, the tiny growth is particularly noteworthy.

In fact, China foreign exchange reserve always presents downward trend since its peak of $3,993 billion in June 2014. In this August, it just declined by the large amount of $93.9 billion. However, why would it rebound recently?

There seem to be three main reasons to explain the slight rise of China foreign exchange reserves.

• First, due to weak foreign demand and lower price level of trade products, China exports declined substantially by 6.9% year-on-year to $192.41 million in October, compared with 3.9% fall in the previous month. In the meanwhile, with the continuous price decline of bulk commodity, imports slumped in a larger range of 18.8% year-on-year in October. As a result, China trade surplus rises significantly to a yearly peak of $61.64 billion by the end of last month. Therefore, the widened trade surplus exactly provides positive contribution to higher foreign exchange reserve.

• Second, although renminbi exchange rate to US dollar rose significantly in this August, it maintains stable during these three months, and is expected to keep smooth fluctuation with trend of slight appreciation in next several months, thus the willingness to hold and purchase foreign exchange by corporations and individuals falls relatively, which may be another reason that brings higher foreign exchange reserve.
• Third, since U.S. Federal Reserve decided not to raise rates at its September meeting, it made capital less likely to flee China for seeking higher returns, which eased the pressure of foreign reserve outflows on China and prevent the further decrease of foreign exchange reserve.

However, the Federal Reserve recently keeps alive the possibility of interest rate increase by the end of this year based on higher employment rate and more steady economic growth. China may encounter the outflows pressure again in coming months.