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China's May forex reserves rise unexpectedly to US$3.1t

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Pressure on China's yuan currency intensified last month after an unexpected escalation in Sino-US trade tensions, dashing market hopes that the two sides were nearing a deal.

[BEIJING] China's foreign exchange reserves unexpectedly bounced back in May after a surprise drop the previous month, suggesting the central bank intervened only lightly to cushion a sharp fall in the yuan currency after US-Sino trade ties soured.

The country's foreign exchange reserves rose US$6 billion in May to US$3.101 trillion, central bank data showed on Monday.

Economists polled by Reuters had expected reserves to drop US$5 billion to US$3.090 trillion.

The unexpected rise in May was due to valuation effects and changes in asset prices, the foreign exchange regulator said in a statement accompanying the data.

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Sound fundamentals in the Chinese economy will underpin operations in the foreign exchange market and provide a solid basis for the stability of forex reserves, the State Administration of Foreign Exchange said.

Pressure on China's yuan currency intensified last month after an unexpected escalation in Sino-US trade tensions, dashing market hopes that the two sides were nearing a deal. Washington raised tariffs on Chinese goods and threatened even more, and Beijing retaliated with higher levies of its own.

At the same time, unexpectedly weak economic data for April suggested China's economy was still struggling for traction, underlining the need for more stimulus on top of a host of growth boosting measures rolled out since last year. Factory surveys for May pointed to further weakness.

The yuan fell 2.5 per cent against the dollar in May, its biggest monthly loss since mid-2018.

However, while the central bank set stronger daily fixings to support the currency, it was not seen intervening to stem the fall until late in the month, when the yuan neared the closely watched 7 to the dollar level. That fuelled speculation China may be allowing the currency to weaken as Beijing weighed its options in response to higher US tariffs.

So far, tough capital controls put in place since the last downturn in 2015-16 have kept outflows largely in check over the past year, despite mounting external and domestic pressures on the economy.

"There may be some forex outflow pressure – one piece of evidence was that the renminbi fixing rates came in significantly stronger than the forecasts over the past few weeks," analysts at the China International Capital Corporation (CICC) wrote in a note before the May data release.

But they also noted US long-term Treasury yields fell in May, which may lift the value of those bonds that China holds in its reserves.

The value of China's gold reserves also rose to US$79.83 billion from US$78.35 billion at the end of April, rising to 61.61 million fine troy ounces from 61.1 million ounces in April.

REUTERS