Event

China’s FX reserves rose by US$20.4bn to US$3,030bn in April, following a US$4.0bn increase in March. In SDR terms, FX reserve holdings edged down to 2,210bn in April from 2,218bn in March.

Meanwhile, China’s gold reserves remained at 59.24mn ounces (or 1,842.6 metric tonnes) for the sixth month, with the USD value rising by 1.74% to US$75.0bn in April.

Comments

The increase in the dollar value of FX reserves was again partially helped by a weaker USD in April. The USD index softened further by 1.3% in April, on the back of rising uncertainties around “Trumpflation” policy implementations, reduced political uncertainties in France/Europe, and continued cyclical strength in the Euroland. More specifically, EUR and GBP strengthened by 2.3% and 3.2% against the USD in April, respectively, while JPY/USD remained largely stable. In light of the currency composition of China’s FX reserves we have estimated, the exchange rate movements should have boosted the valuation of China’s FX holdings by around US$23.4bn in April.

Net FX outflows may have also remained muted in April. Net of the valuation effect, the implied FX outflows edged down to US$3bn in April using the same calculation, compared with US$6bn in March. The average daily FX trading volume in the onshore market edged up by 3.8% MoM to US$24.6bn in April, but the absolute level remained relatively benign.

Looking forward, China’s FX reserve level may continue to hold up well in the near term. We expect the RMB depreciation expectation to fade further in 2017, driven by the recovery of domestic investment returns and a relatively weaker USD. Accordingly, capital outflows are likely to moderate notably in 2017. We have already seen slower FDI outflows, higher ratio of exporter repatriation, as well as rising FX external debt in 2017, all likely to support the FX reserves level. On the other hand, there may be limited upside for the US dollar index this year considering the reduced political uncertainties in the Euroland and the relatively cyclical strength of Eurozone economy. Therefore, the valuation effect may not be a big drag for the dollar value of China’s FX reserves this year.