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

The information published by DBS Bank Ltd. (company registration no.: 196800306E) (“DBS”) is for information only.  It is based on information or opinions obtained from sources believed to be reliable (but which have not been independently verified by DBS, its related companies and affiliates (“DBS Group”)) and to the maximum extent permitted by law, DBS Group does not make any representation or warranty (express or implied) as to its accuracy, completeness, timeliness or correctness for any particular purpose.  Opinions and estimates are subject to change without notice.  The publication and distribution of the information does not constitute nor does it imply any form of endorsement by DBS Group of any person, entity, services or products described or appearing in the information.  Any past performance, projection, forecast or simulation of results is not necessarily indicative of the future or likely performance of any investment or securities.  Foreign exchange transactions involve risks.  You should note that fluctuations in foreign exchange rates may result in losses.  You may wish to seek your own independent financial, tax, or legal advice or make such independent investigations as you consider necessary or appropriate.

The information published is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to subscribe to or to enter into any transaction; nor is it calculated to invite, nor does it permit the making of offers to the public to subscribe to or enter into any transaction in any jurisdiction or country in which such offer, recommendation, invitation or solicitation is not authorised or to any person to whom it is unlawful to make such offer, recommendation, invitation or solicitation or where such offer, recommendation, invitation or solicitation would be contrary to law or regulation or which would subject DBS Group to any registration requirement within such jurisdiction or country, and should not be viewed as such.  Without prejudice to the generality of the foregoing, the information, services or products described or appearing in the information are not specifically intended for or specifically targeted at the public in any specific jurisdiction.

The information is the property of DBS and is protected by applicable intellectual property laws. No reproduction, transmission, sale, distribution, publication, broadcast, circulation, modification, dissemination, or commercial exploitation such information in any manner (including electronic, print or other media now known or hereafter developed) is permitted.

DBS Group and its respective directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned and may also perform or seek to perform broking, investment banking and other banking or financial services to any persons or entities mentioned.

To the maximum extent permitted by law, DBS Group accepts no liability for any losses or damages (including direct, special, indirect, consequential, incidental or loss of profits) of any kind arising from or in connection with any reliance and/or use of the information (including any error, omission or misstatement, negligent or otherwise) or further communication, even if DBS Group has been advised of the possibility thereof. 

The information 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.  The information is distributed (a) in Singapore, by DBS Bank Ltd.; (b) in China, by DBS Bank (China) Ltd; (c) in Hong Kong, by DBS Bank (Hong Kong) Limited; (d) in Taiwan, by DBS Bank (Taiwan) Ltd; (e) in Indonesia, by PT DBS Indonesia; and (f) in India, by DBS Bank Ltd, Mumbai Branch.