China’s FX reserves picked up further by US$5.8bn to US$3,118bn in July, following US$1.5bn increase in June. China’s FX reserves level rose for another month despite the market consensus of a US$ 5 bn drop in July. In SDR terms, FX reserve level also picked up by 6.8bn to 2,219bn in July. Meanwhile, China’s gold reserves remained flat at 59.24mn ounces (or 1,842.6 metric tonnes), with their USD value down by 2.4% MoM to US$72bn in July.

The valuation effect may have been largely neutral in July. The dollar index strengthened by 0.1% in July by appreciating 0.6% vs. the GBP and 1.0% vs. the JPY, while staying flat vs. the EUR. In light of the currency composition of China’s FX reserves we have estimated, there may have been roughly US$ 3 bn of negative valuation effect from exchange rate fluctuation in July. However, on the other hand, the gain in US stocks indices may have boosted the asset value of the equity portfolio somewhat.

Rising FX reserves in July despite accelerated depreciation of the CNY indicates that there may have been very limited FX intervention by the PBoC despite spiking volatilities for CNY and CNH last month. According to our rough estimate, the implied FX net inflows may be around US$8.6bn in July. The CNY depreciated 2.9% vs. the USD and 3.4% vs. the basket last month, largely driven by deteriorated short-term demand for the CNY. However, as we have highlighted repeatedly in our recent research, very different from the 2015-2016 CNY depreciation episodes, we are yet to see signs of large-scale speculation against the CNY exchange rate or signs of FX outflow – the July FX reserve number confirms this view. We will wait for the monthly PBoC FX position balance to reconfirm this assessment.