On September 7, the State Administration of Foreign Exchange released the latest data showing that as of the end of August 2022, China's foreign exchange reserve balance was US$3054.9 billion, a decrease of US$49.2 billion from the end of July.

Currently, the scale of China's official foreign exchange reserves remains above US$3 trillion, exceeding the agreed scale under floating exchange rate system recognized by IMF (US$2.6 trillion). This shows that China's current foreign exchange reserves are still relatively sufficient

article | "Financial" special correspondent Zhang Weilong

edit | Zhang Weilong

edit | Yuan Man

On September 7, State Administration of Foreign Exchange released the latest data showing that as of the end of August 2022, the balance of China's foreign exchange reserve was US$3054.9 billion, a decrease of US$49.2 billion from the end of July.

Deputy Director and spokesperson of the State Administration of Foreign Exchange Wang Chunying said that in August 2022, cross-border capital flows were rational and orderly, and domestic foreign exchange supply and demand remained basically balanced. In the international financial market, affected by the expectations of major countries' monetary policy , macroeconomic data and other factors, the US dollar index rose, and the global financial asset prices generally fell. The combined effect of factors such as exchange rate discount and asset price changes, the scale of foreign exchange reserves decreased in the month.

Director of the Global Macro Office of the Institute of Economics and Political Science, Chinese Academy of Social Sciences Xiao Lisheng believes that the rise in bond yields in major countries around the world, such as the US dollar index and the United States, is the main reason for the decline in China's foreign reserves in August. "It is worth noting that the US dollar index rose by about 2.67% in August. It is roughly estimated that this has led to a decline in China's foreign reserves by nearly 30 billion US dollars, which shows that the decline in China's foreign reserves is still greatly affected by the appreciation of the external dollar."

In the view of Tang Yao, associate professor at the Guanghua School of Management, Peking University, in recent years, the scale of China's foreign reserves has been stable overall. At the same time, China's exports performed strongly, with a long-term surplus of current accounts. Data from the State Administration of Foreign Exchange shows that the current account surplus in the first half of this year reached 1096 billion yuan, slightly exceeding half of the surplus for the whole year last year, which shows that China's current economic fundamentals are stable. In this context, there is no need to worry too much about small fluctuations in foreign exchange reserves.

strong dollar shock wave

Director of Yingda Securities Research Institute Zheng Houcheng believes that there are two main factors that have negative impact on China's foreign reserve scale in August: First, the US dollar index rose, lowering the prices of non-US assets. Second, the yields of 10-year treasury bonds in major developed economies rose from the previous value in August, driving the decline in asset prices.

8, the US dollar index opened at 105.880 and closed at 108.660, an increase of 2.67%. Among non-dollar currencies, the euro fell 1.6%, the pound fell 4.5%, and the yen fell 4.1%. The yields of 10-year U.S. bonds, British bonds and German bonds rose by 48, 96 and 61 basis points respectively. Major overseas stock indexes showed a significant pullback, with the US S&P 500 falling 4.2%, and the euro zone Stoke 50 fell 5.1%. According to media estimates, for China's foreign reserves, exchange rate fluctuations and bond yields in August may bring about a negative valuation effect of about US$29 billion.

As the US dollar index strengthens and the "double bear" of stocks and bonds in developed countries, the market already has expectations for a decline in China's foreign reserves.

In Xiao Lisheng's view, the decline in foreign exchange reserves in August is still mainly related to changes in the financial environment of the United States and other countries, and there is no obvious positive correlation with other factors. "Assuming that 55% of China's foreign exchange reserves are US dollars, and 45% are other currencies such as the euro and Japanese yen. Against the backdrop of the US dollar appreciating by about 2.67% compared with other currencies in August, the valuation loss of China's foreign exchange reserves is about US$30 billion, accounting for a large share of the decline in China's foreign exchange reserves." He further analyzed. According to media estimates, the outflow of foreign reserves in August due to temporary capital outflows exceeded US$20 billion.

Xiao Lisheng also said that from an international perspective, due to factors such as strong US dollar and higher yields in US bonds, foreign reserves in other Asian countries such as Japan and South Korea have also declined, indicating that China's situation is not an isolated case. From a domestic perspective, overseas capital has recently returned to the domestic stock and bond markets, which has significantly reduced the pressure on China's capital outflow in the near future.

8, the yen hit a new low in 20 years and the Korean won hit a new low after the financial crisis.Meanwhile, at the end of August, Japan's foreign exchange reserves were US$1292.1 billion, down US$31 billion from the end of July. South Korea's foreign exchange reserves were US$436.4 billion at the end of August, down US$2.2 billion from the end of July.

html Since August, overseas investors have generally net bought China Securities . According to data from the financial terminal Choice, following the net outflow of A shares in July, northbound funds in August had a slight net inflow of A shares in 12.713 billion yuan.

Zheng Houcheng said that in addition to the above two factors, trade is also a major factor affecting the scale of China's foreign reserves. Data from the General Administration of Customs shows that in August, China's trade surplus was US$79.39 billion, which was lower than the previous value, but it still expanded by 34.1% year-on-year, which supported the foreign exchange reserves in August.

The scale of foreign exchange reserves is generally stable

In recent years, China's foreign exchange reserves have been above US$3 trillion, showing a slight fluctuation trend. At present, China's foreign reserve scale is facing a US$3 trillion mark again. Can the current foreign reserve scale be sufficient to deal with various uncertain risks?

International Monetary Fund (IMF) recommends that a country's expected foreign exchange reserve scale needs to comprehensively consider short-term foreign debt, other foreign debt, export amount and broad money supply (M2) scale, and these four different weights are given according to different financial systems and structures. The IMF's recommendation for unexpected foreign exchange reserves mainly considers that when a country encounters emergencies or major shocks, foreign exchange reserves may need to use foreign exchange reserves to deal with risks such as decline in export income, debt rollover risks and capital flight, in order to maintain currency stability and financial stability. However, even if the exchange rate system is considered, the IMF recommended that the scale of contingent foreign exchange reserves only needs to cover 30% of short-term foreign debt and 10%-15% of other foreign debts, and does not need to cover all or even exceed the scale of foreign debt.

Xiao Lisheng said that according to China's short-term debt, other liabilities, export amount and M2 scale in 2021, under the fixed exchange rate system, China's foreign exchange reserve scale needs US$4.6 trillion, and under the floating exchange rate system, China's foreign exchange reserve scale only US$2.6 trillion. "Although the RMB exchange rate has not yet achieved clean floating (free floating), since the exchange rate change of in '8·11', the floating elasticity of the exchange rate has increased significantly. The RMB exchange rate against the US dollar fluctuates by 4% in a single month, which is obviously not a fixed exchange rate system. At present, the scale of China's official foreign exchange reserves remains above US$3 trillion, exceeding the agreed scale under the floating exchange rate system recognized by the IMF (US$2.6 trillion), which shows that China's current foreign exchange reserves are still relatively sufficient." He said.

Tang Yao also believes that from the perspective of foreign exchange payment demand under current account, the scale of China's foreign reserves is sufficient. After the exchange rate reform of "8.11", China achieved flexible two-way fluctuations in the exchange rate, which can absorb and alleviate the impact of factors such as foreign monetary policy on capital flows under capital accounts through exchange rate changes. As long as China's current account fundamentals remain stable, the financial market continues to develop and open, and monetary policy adheres to the principle of prudentness, short-term pessimistic expectations will be gradually reversed. In order to prevent cross-border transmission of financial risks, the central bank has also included foreign debts as part of the overall economic liabilities in a macro-prudential framework for supervision.

Since mid-April, the RMB exchange rate against the US dollar has been declining. As of September 8, the exchange rates of onshore RMB and offshore RMB against the US dollar were 6.9627 and 6.9653, only one step away from "breaking 7". For the central bank, in addition to lowering the reserve ratio of foreign exchange deposits in financial institutions and strengthening the control of the RMB mid-price, the use of foreign exchange reserves is also one of the important ways to stabilize the RMB exchange rate and avoid disorderly capital outflows.

But in Xiao Lisheng's view, it is not very likely that the central government will use foreign reserves to interfere in the market at present. "First, since 2018, the central bank has increasingly emphasized avoiding direct market intervention. Secondly, the central bank will take action only when there is a large-scale capital flight, a credit crisis, and the price of treasury bonds falls." He said, "Although the RMB is declining at present, the depreciation speed and amplitude are controllable.Moreover, appropriate depreciation is conducive to China's trade and exports, which will provide a certain degree of support for China's economy and foreign reserves. In addition, the US economy is facing the risk of a hard landing. Fed will not keep hiking interest rates at , and the US dollar index will also fall from a high level in the future. "He said.

Wang Chunying said that the current external environment is becoming more complex and severe, the downward pressure on the global economy is increasing, and the international financial market fluctuates violently. However, China's normalized epidemic prevention and control and economic and social development, implements a package of policies to stabilize the economy in depth, and maintains the economy within a reasonable range, which is conducive to the overall stability of the scale of foreign exchange reserves.