Yuan Devaluation Expectation is Main Cause of Seven Straight Months' Rise in Forex Reserves
Wang Jiaxin|Xu Yanyan
/SOURCE : Yicai
Yuan Devaluation Expectation is Main Cause of Seven Straight Months' Rise in Forex Reserves

(Yicai Global) Sept. 8 -- Foreign exchange (forex) reserves at the end of last month were USD10.8 billion more than the previous month.

 This demonstrated the seventh straight month of growth, as the latest forex reserve data the People's Bank of China (PBOC) outed shows.

 One key reason for this continuous rise is the expectation of yuan devaluation.

 The balance of China's forex reserves in August was USD3.09 trillion, USD10.8 billion higher than at the end of July. On the same day, the yuan-dollar exchange rate broke through 6.50 for the highest figure recorded since June 2016.

 "The expectation of RMB devaluation has been largely priced in by August, and the willingness of enterprises and individuals for forex settlement and sale has clearly changed," said Zhao Qingming, chief economist at China Financial Futures Exchange (CFFEX). "Enterprises are no longer eager to purchase forex, and exchange settlement scale is limited. Supply and demand in the forex market is more balanced, and even demand for yuan is greater than supply."

 In which case, PBOC need not continuously devour forex reserves since inputting more foreign currency into the market is unnecessary, Zhao noted.

 The deficits of banks for forex settlement and sales in May, June and July are respectively, USD17.1 billion, USD20.9 billion and USD15.5 billion, a large narrowing from earlier this year. Funds outstanding for forex in July were a mere CNY4.47 billion, down in comparison with the previous decline of tens of billions. "The forex settlement and sales of banks may turn around in August," Zhao said.

 The exchange rate of the euro -- the second largest currency in China's forex reserve -- to dollars has cumulatively risen more than 13 percent, Zhao added. The exchange rate conversion still contributes positively overall to forex reserves. The reasons for the continuous rise of forex reserves further include investment income from these reserves.

 The main reasons for the forex reserve increases are that the macro-economy holds forth good prospects, and expectations for the yuan-dollar exchange rate are firming even more, said Wen Bin, chief researcher with China Minsheng Banking Corp. [SHA:600016] (CMBC). The deficit for forex settlement and sale in August may have further narrowed, and funds outstanding for forex may have turned upward.

 The continuous rise of forex reserves caused China's cross-border capital flow and supply and demand of forex market to maintain a balance in August, while asset price rises in international financial markets drove the expanded scale of foreign reserves.

 The rising cycle of the US dollar index has come to an end long term, Zhao believes. The US dollar index has cumulatively dropped 10 percent thus far, and is expected to keep falling in the next five to seven years. When non-USD currencies are generally rising and China's economic fundamentals stay stable, the yuan-dollar exchange rate must also rise.

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Keywords: MSCI , Foreign Exchange Reserve , RMB , Market Expectation