Reserves fell $14.23 billion in May to $3.111 trillion, the lowest level since October, compared with a drop of $17.97 billion in April, central bank data showed on Thursday.
China’s foreign exchange reserves fell slightly in May to its lowest in seven months as the U.S. dollar rebounded strongly and regulators continued their efforts to increase cross-border use of the yuan. Reserves fell $14.23 billion in May to $3.111 trillion, the lowest level since October, compared with a drop of $17.97 billion in April, central bank data showed on Thursday. Economists polled by Reuters had expected reserves to drop by $25 billion to $3.10 trillion.
The State Administration of Foreign Exchange (SAFE) said the size of China’s foreign exchange reserves should remain stable overall. A decline in other currencies versus the U.S. dollar was the main reason for the small decline in the dollar value of the reserves in May, SAFE said in a statement. The Chinese currency lost 1.2 percent of its value against a surging dollar in May, the second straight month of decline, but it is still up 1.7 percent so far this year.
Capital flight was seen as a major risk for China at the start of 2017, but a combination of tighter capital controls and a faltering dollar helped the yuan stage a strong turnaround, bolstering confidence in the economy. Last year China’s reserves rose for the first time since 2014 and its cross-border capital flows went from net outflows to basically stable. But China’s forex regulator warned in a recent statement that the cross-border capital flows are facing risks of external shocks from rising trade and investment protectionism. Recent negotiations between Washington and Beijing appear to have made little progress toward reducing trade tensions.
While a rising dollar this year has put pressure on some emerging market currencies, the yuan should be more resilient as China funds itself using domestic savings and is much less exposed to dollar strength than other economies, Marie Diron, managing director of Moody’s Sovereign Risk Group, said in an interview with Reuters on Tuesday. “When we’ve seen pressure on the currency before it was related to the change in the currency regime and the uncertainty about how fast the (yuan) would depreciate…all this seems to have stabilised greatly,” said Diron.
The long-awaited June 1 inclusion of Chinese stocks into MSCI’s benchmark equity indexes, expected to drive strong demand for the Chinese currency, only received lukewarm initial reaction from foreign investors. The value of China’s gold reserves fell to $73.739 billion at the end of May, from $77.788 billion at the end of April.