China: Forex reserves hit a 16-month high


China's forex reserves increased US$21.6bn to US$3.16tn in January. We believe a repeat of the 2015/16 capital flight is unlikely even if the global market sell-off deepens. Find out why.
Nathan Chow08 Feb 2018
Photo credit: AFP Photo


China’s foreign exchange (forex) reserves climbed US$21.6bn to US$3.16tn in January. This 12th consecutive monthly increase reflects a combination of factors from favourable valuation to tight capital flow measures.

The Euro’s 3.4% appreciation against the US dollar last month added about US$20bn to the stockpile. To prevent irrational outbound investment, the China Insurance Regulatory Commission announced in January that shareholders of insurance firms are not allowed to interfere in the operation of insurance funds. Measures to reduce leverage will also be introduced.

Seasonal factors also played a role. Corporate dollar supply outweighed demand ahead of the Chinese Lunar New Year and discouraged investors from converting the Chinese yuan into foreign currencies.

Looking forward, we expect foreign reserves to be broadly stable in 2018. Inflows into the onshore bond market and confidence in the economy have lifted the yuan up 4% YTD against the US dollar.
Notably, the yuan has been stable amidst increased volatility from the global market sell-off this week. CNY and CNH changed hands at 6.2550 and 6.2625, respectively, at 1:30pm on 7 February – their strongest levels since the 2015 devaluation. The onshore-offshore spot spread remains unchanged around -100 pips (CNY<CNH). 12-month implied volatility for USD/CNH hovered at 6%, compared to 10.6% seen in early-2016. The interbank market was relatively calm; repo rates were largely unchanged from last week.

Even if the global market sell-off deepens, don’t expect a repeat of 2015/16, i.e. a plunge in the yuan and capital flight. First and foremost, there will be no surprise one-off yuan devaluation like in August 2015. There are also less worries about the economy especially after full-year growth accelerated last year for the first time since 2010. The Caixin China Composite Purchasing Managers’ Index (PMI) released on Monday rose to 53.7 in January, its highest since January 2011. The firmness in the flash PMIs of developed countries at the start of the year also pointed to continuous support for exports from a global synchronised recovery.

Some downward pressure in the yuan exchange rate, however, can be expected if global markets remain volatile. Apart from safe haven bids in the US dollar, it would also discourage interbank rates from rising in China. Even so, don’t expect a disruptive depreciation due to the strong enforcement of capital flow measures and the prominent presence of state-owned banks to smoothen volatility in the forex market.

To read the full report, click here to Download the PDF.

  Nathan Chow
Strategist - China & Hong Kong
nathanchow@dbs.com

The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.

PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422.