As of the end of March 2019, Chinaforeign exchange reservesIt rose by $8.6 billion from the end of February. This is the fifth consecutive month of rising foreign exchange reserves in China.
Since November last year, the value of RMB assets has become prominent, attracting foreign capital to continue to flow in. More and more international capital favors China's stock market and bond market. At the same time, the exchange rate of the RMB against the US dollar has stabilized and rebounded. The US dollar index has fallen from a high level, and the value of non-US dollar assets held by China has also increased.
Generally speaking, the fundamentals of the Chinese economy have not changed for a long time, and the "automatic stabilizer" function of the exchange rate has gradually appeared, which is conducive to the stability of China's foreign exchange reserves. With the advancement of China's reforms, the channels for foreign capital to enter the Chinese capital market will be further broadened, and RMB assets will remain attractive to foreign capital.
According to data recently released by the State Administration of Foreign Exchange, by the end of March 2019, China’s foreign exchange reserves stood at US$3,088.8 billion, an increase of US$8.6 billion from the end of February, an increase of 0.3%. This is the fifth consecutive month of rising foreign exchange reserves.
In the past year, China’s foreign exchange reserves have “goes out” a “V” shape. From the beginning of last year to October, the scale of foreign exchange reserves fell more, and the cumulative decline exceeded 100 billion US dollars. There was a clear rebound in November, and it has now risen for five consecutive months.
Zhao Qingming, chief economist at the China Financial Futures Exchange Research Institute, said that from the perspective of last year, the overall size of foreign exchange reserves has declined, but not much. As of the end of 2018, China’s foreign exchange reserves stood at US$307.27 billion, a decrease of US$67.2 billion from the end of 2017.
What are the main reasons for the five consecutive rises in foreign exchange reserves? What changes have occurred in the source structure of foreign exchange reserves? What is the trend of future foreign exchange reserves? What risks do you need to pay attention to?
Changes in the size of foreign exchange reserves, related to exchange rates, holding bond valuations and capital inflows
Foreign exchange reserves are the “family” of foreign exchange owned by a country. The value of foreign exchange assets held is often fluctuated due to the fluctuation of foreign exchange rates.
Zhao Qingming analyzed that there were two main reasons for the decline in foreign exchange reserves in the first 10 months of last year: First, the pressure of capital outflows has appeared. Second, since the beginning of April last year, the US dollar exchange rate has rebounded significantly. The US dollar index rebounded from around 88 to around 97, meaning non-US dollarcurrencyFor example, the exchange rate of the euro, the yen and the pound against the US dollar fell accordingly. There is a certain amount of non-US dollar assets in China's foreign exchange reserves. Last year, the US dollar index rose by about 10%. When this part of assets is converted into US dollars, there will be corresponding losses.
Since November last year, the value of RMB assets has been highlighted, attracting foreign capital to continue to flow in. At the same time, the exchange rate of the RMB against the US dollar has stabilized and rebounded. The US dollar index has fallen from a high level, and the value of non-US dollar assets has increased.
Another important reason for the increase in foreign exchange reserves is the rise in bond valuations. Most of China's foreign exchange reserves are bonds. In March of this year, both US bond yields and European bond yields declined. The decline in bond yields corresponds to an increase in bond valuations, which led to a growth in foreign exchange reserves.
“Last year we took the initiative to lower tariffs and expand imports. Trade changes brought about a current account deficit, but through stock and bond investments.Net inflowAfter offsetting the current account deficit and other net capital outflows during the same period, foreign exchange reserves still increased. Zhao Qingming said.
Wang Chunying, spokesperson of the State Administration of Foreign Exchange and chief economist, analyzed that since the beginning of this year, China’s foreign exchange market has been running more stable, with major channels crossing the border.Cash flowThe situation has further improved, providing a solid foundation for the stability of foreign exchange reserves.
The current account surplus formed through trade exports narrows, while stock and bond capital inflows increase
Maintaining balance of payments is an important aspect of macroeconomic goals. When a country’s international income equals international spending, it achieves a balance of payments. The balance of payments relates to the current account and the capital account, where the current account is formed through the export of trade and services, while the capital account includesForeign direct investmentAnd indirect investment. The current account and capital account surpluses determine the changes in the size of foreign exchange reserves.
In the past, China's foreign exchange reserves were mainly composed of two parts: one was the total foreign trade surplus in the current account, and the other was the net inflow balance of foreign direct investment in the capital account.
Since last year, the structure of China’s balance of payments has begun to change, and the traditional factors that constitute the source of foreign exchange reserves have declined. Guotai Junan Securities Chief MacroAnalystGao Ruidong analyzed that China’s current account surplus narrowed in 2018, with the trade surplus of goods falling by 17% and the trade deficit of services expanding by 13%. Loans and trade under the capital accountCreditOther investments have also turned from negative to negative, from a surplus of 77 billion US dollars to a deficit of 51.9 billion US dollars.
At the same time, indirect investment under the capital account has seen a significant rebound, cross-border stocks and bonds.Stock investmentThe funds have increased. In 2018, the direct investment and securities investment surplus in China's capital account expanded rapidly. The direct investment surplus was US$107 billion, an increase of 2.9 times over the previous year. The securities investment surplus was US$106.7 billion, an increase of 2.6 times over the previous year.
This shows that more and more international capital favors China's stock market and bond market. Guan Tao, a senior researcher at the China Financial Forty Forum, said that by the end of last year, foreign investors’ equity holdings in China were 1.15 trillion yuan, accounting for 3.2% of the domestic market capitalization, an increase of 1.6 over the end of 2016. Percentage points; the amount of RMB bond assets held was 1.17 trillion yuan, accounting for 3% of the market value of bond custody, an increase of 1 percentage point from the end of 2016.
It is expected that the RMB exchange rate will be relatively stable in the future, and the Chinese market will continue to attract foreign investment.
The purpose of foreign exchange reserves is to stabilize the currency. When the depreciation pressure of the domestic currency exchange rate is relatively large, the central bank will use foreign exchange reserves, throw foreign currency in the foreign exchange market, and buy domestic currency to stabilize the RMB exchange rate.
Wang Chunying believes that the current global economic uncertainty has risen, economic growth is facing downward pressure, financial asset prices are still at a high level, and international financial market volatility may increase. However, China's economic operation will remain in a reasonable range. As the flexibility of the RMB exchange rate increases, the “automatic stabilizer” function of the exchange rate gradually emerges, which is generally conducive to the stability of China's foreign exchange reserves.
At the press conference of the two sessions this year, the director of the People's Bank of China, Yi Gang, said that it would not use competitive exchanges and not use the exchange rate for competitive purposes, and would not use the exchange rate to improve China's export competitiveness.
"From the performance of the RMB exchange rate, the RMB exchange rate has been relatively stable. Especially since June 2017, the RMB exchange rate has strengthened. Compared with some other major currencies, the RMB exchange rate has risen slightly." Zhao Qingming said that the RMB exchange rate is expected. Ultimately, it is still determined by economic fundamentals. The long-term fundamentals of the Chinese economy have not changed, and the RMB exchange rate will continue to remain stable.
Cross-border capital flows tend to be more risky, and can the future of capital inflows continue? Does the Chinese market continue to attract foreign investment? The answer is yes.
Xing Ziqiang, chief economist at Morgan Stanley China, analyzed that China is advancing reforms to further broaden the channels for foreign investment in the Chinese securities market, improve transaction convenience, and raise the level of supervision. At the same time, China has accumulated a large number of listed companies, and the bond market has leapt to the second place in the world. The underlying foundation of RMB assets is rich, which can provide investors with more choices. The return on the stock and bond markets in China is less correlated with the world's major indices. In addition, the status of the international reserve currency of the renminbi is expected to rise, so the renminbi assets are quite attractive from the perspective of asset allocation or sharing.
(Article source: People's Daily)