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Sep 8, 2020
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China’s foreign reserves rebounded for five consecutive months, hitting a four-year high

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China’s foreign exchange reserves increased by 10.2 billion U.S. dollars in August, which is a five-month recovery. The balance of foreign reserves has reached the highest point since September 2016. The U.S. dollar continued to fall in August, and the bond market yields of the United States, Europe, and Japan fell slightly. Conducive to the recovery of foreign reserves.

Although there is still considerable uncertainty in Sino-U.S. relations, as the flexibility of the RMB exchange rate has increased significantly, and the regulatory authorities’ tolerance for exchange rate fluctuations has increased, the probability of using foreign reserves to intervene in the exchange rate is unlikely, and the subsequent foreign reserves are also very large. It is difficult to reproduce the situation of large changes, and a strong exchange rate will attract more capital inflows and bring more foundations for the scale of foreign reserves.

From a valuation perspective, the U.S. dollar index depreciated by 1.29% in August, while the euro and the pound rose by 1.38% and 2.15% against the U.S. dollar respectively. Also, the 10-year U.S. Treasury yield fell by 16 basis points (BP) in the same month; Europe and Japan 10 years Treasury bond yields also fell slightly; Reuters calculated on this basis that exchange rate and bond market fluctuations in August may bring about a positive valuation effect of approximately US$16 billion.

According to a comprehensive estimate, the reduction in foreign reserves caused by the temporary capital outflow in August was approximately US$5.8 billion; the reduction in foreign reserves caused by the temporary capital outflow last month was approximately US$7.9 billion.

In August, China and the United States evaluated the implementation of the first phase of the trade agreement, and both sides gave positive comments, which obviously alleviated market anxiety, and the renminbi quickly entered a trend of “complementary gains”. Although the A-shares fluctuated at a high level and there was a slight outflow of northbound funds, the Sino-US interest rate gap remained at a very wide level, and the exchange rate was relatively strong. Foreign capital’s willingness to allocate RMB assets continued to rise.

According to the latest data from China Bond Board and Shanghai Clearing House, in August, foreign institutions accumulatively increased their holdings of RMB assets by more than 130 billion RMB, marking the 21st consecutive month of increasing holdings of RMB bonds.

Also, China took the lead in getting rid of the epidemic, and the export industry chain continued to improve. The current account trade surplus is likely to remain at a relatively high level. As the market’s expectations for the RMB exchange rate shift to the direction of appreciation, and customers’ expectations for the mid-term depreciation of the US dollar tend to be consistent, The foreign exchange rate is expected to rise further. From a certain perspective, the scale of foreign reserves may pick up passively.

In August, the renminbi appreciated by 1.84% against the U.S. dollar to 6.8535 yuan. Starting from June, the renminbi has risen by more than 4%. During the period, the U.S. index has risen by about 5.5%. It can be considered that the renminbi has basically reflected the impact of the U.S. dollar shortly. There is a certain inertia. If there is no impact from a key event, the RMB may still perform to a certain extent.

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