China’s foreign exchange reserves slipped to $3.125 trillion at the end of April, down by about $18 billion or 0.57 percent from March, officials announced on May 7.
Experts said that should serve as a warning for the country’s financial regulators to keep a close watch on cross-border capital outflows after some emerging markets suffered foreign exchange market sell-offs amid a stronger US dollar.
The country’s foreign exchange regulator, however, said on May 7 that it is confident of stable cross-border capital flows without sharp fluctuations in the yuan’s exchange rate after the People’s Bank of China, the central bank, announced the drop in last month’s foreign exchange reserves.
A spokesperson for the State Administration of Foreign Exchange, China’s foreign exchange regulator, said in a statement on its website that an increase of more than 2 percent in the US dollar index in April has reduced the value of nondollar denominated assets in foreign reserves－a main reason for the contraction in reserves.
“But the foreign exchange reserves are expected to remain stable in the future” because of China’s sound economic growth momentum and its deepening of opening-up in its financial sectors, as well as the steady global economic recovery, according to the spokesperson.
The dollar bulls roiled global financial markets last week, prompting a wave of selling in emerging market currencies, stocks and bonds. Argentina, for instance, was forced to raise interest rates three times to fight a sharp depreciation of the peso.
China registered the first quarterly current account deficit in 17 years in this year’s first quarter. Such a deficit is when imports exceed exports. The deficit was $28.2 billion, compared with a surplus of $18.4 billion a year ago. But the market seems to have fewer concerns over China than other emerging markets. This is because of China’s stable macroeconomic conditions and its record of successful control of capital flight, although Sino-US trade tensions may increase uncertainties in the financial sector, according to economists.
“There is suspicion that market caution over the Sino-US trade talks weighed on risk sentiment, consequently impacting emerging market assets,” said Lukman Otunuga, a research analyst at foreign exchange broker ForexTime, after the two countries ended trade talks on May 4 and agreed to continue “close communication”.
The agreement “could continue soothing concerns over a global trade war”, Otunuga said.
The trade deficit that continued is a possible factor in depressed foreign exchange reserves, but the deficit won’t be “persistent”, said Iris Pang, an economist with ING Bank.
“We expect (capital) inflows will continue to be greater than outflows for the rest of the year, which would help to build up foreign exchange reserves,” said Pang.
ING, of the Netherlands, expects the yuan’s appreciation to continue, albeit mildly, at around 2.6 percent in 2018, which is enough to prevent continual capital outflows.
China has announced relaxation of the restrictions on foreign direct investment in domestic financial markets, which will help attract more foreign funds, said Jing Ulrich, managing director and vice-chairwoman of J.P. Morgan, Asia Pacific.