China's foreign exchange reserves rise to five-year high

China’s foreign exchange reserves rose to a five-year high of USD3.2218 trillion in May due to changes in asset prices after the United States dollar depreciated. By the end of May, the country’s forex reserves had risen by USD23.6 billion, or 0.74%, from April, the highest level in more than five years, the State Administration of Foreign Exchange (SAFE) said. The U.S. dollar index dropped by nearly 1.6% last month, while the pace of yuan appreciation accelerated and hit a three-year high by the end of May due to strong capital inflows and exports. “The yuan supply-demand relationship in the forex market is still at an equilibrium in general. As such, the yuan appreciation has little influence on the volume of foreign exchange reserves.

The key reason for the growth in reserves was the valuation of assets,” said Guan Tao, Global Chief Economist of BOC International (China). Another reason was falling U.S. Treasury yields, which boosted bond prices. U.S. stocks also edged up, said Guan. Employment data for May may not change the U.S. Federal Reserve’s dovish monetary policy, while the pickup in consumer inflation may push the Federal Reserve to slow down its massive bond ?buying program, said experts.

Besides the external uncertain?ties, China’s robust trade data and steady capital inflows have support?ed the stable growth of foreign exchange reserves, said experts. “It is expected that the yuan exchange rate will be at a reasonable level in the next stage, with two-way fluctuations, while forex supply and demand will be balanced,” said Wen Bin, Chief Researcher at China Minsheng Bank, adding that enterprises and financial institutions should pay attention to risk prevention, adapt to the normalized two-way fluctuations and use risk neutral as a basic concept in exchange rate risk management, the China Daily reports.