China June FX reserves unexpectedly rise amid trade war fears


China’s foreign exchange reserves unexpectedly rose in June, driven by changes in the value of its holdings and even as concerns of a full-blown trade war between Beijing and the Washington rattled markets.

Reserves rose $1.51 billion in June to $3.112 trillion, compared with a drop of $14.23 billion in May, central bank data showed on Monday.

Economists polled by Reuters had expected reserves to drop by $10.6 billion to $3.10 trillion.

The small increase in reserves was due asset price changes, the State Administration of Foreign Exchange (SAFE) said in a statement.

The Chinese currency and equity markets had been on edge ahead of July 6, when U.S. tariffs on $34 billion worth of Chinese goods kicked in. Beijing has retaliated with tariffs on U.S. products of the same value.

The heightened Sino-U.S. trade tensions have sparked concerns of capital outflows from China and threatened to pile more pressure on the Chinese currency.

In June, the yuan suffered its worst month on record, falling 3.25 percent against the U.S. dollar. June also represented the worst month for Chinese stocks in more than two years.

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, the yuan reversed three straight years of depreciation against the U.S. dollar and China’s cross-border capital flows went from net outflows to basically stable.

The yuan fell through a key psychological level of 6.7 on the U.S. dollar on July 3. The Chinese authorities made remarks the same day to assure markets it would keep the currency stable.

China’s forex regulator said in the commentary on Friday it expects the country’s foreign exchange reserves to remain stable, despite rising trade protectionism and Federal Reserve interest rate increases.

Despite the market tumult in the past week, China appears broadly comfortable with a weakening yuan and would intervene only to prevent any destabilizing declines or to restore market confidence, policy insiders told Reuters.

Authorities are also confident they won’t have to make heavy use of the official foreign exchange reserves to defend the yuan as they did during 2015 when stocks and the currency went into a tailspin.

The value of China’s gold reserves fell to $74.071 billion at the end of June, from $77.323 billion at the end of May.

Source: Reuters

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