Commentary on Political Economy

Sunday 6 October 2019


Shanghai | China's foreign exchange reserves fell unexpectedly last month in what some economists say is a sign of its weakening negotiating position in US trade talks. Beijing, however,  ascribed the decline to currency fluctuations.
The country's foreign exchange reserves fell  US$15 billion ($22.2 billion) in September to US$3.092 trillion ($4.582 trillion), according to data published by regulators. This was lower than the median of forecasts by economists polled by Bloomberg, who predicted US$3.106 trillion.
Countries typically buy or sell foreign currency to influence the value of their own. The US in August accused China of "currency manipulation" to make its exports cheaper, as part of broader rhetoric in the two countries' tit-for-tat tariff war.
The yuan rose 0.14 per cent against the US dollar in September after a sharp drop the previous month. In early August, China hit back at Donald Trump's escalation of the trade war by allowing the yuan to weaken beyond 7 per US dollar for the first timesince the global financial crisis.
While China attributed the latest decline in reserves to currency fluctuations, some economists were sceptical. Others suggested only $US5 billion of the $US15 billion drop was accounted for by changing valuation.
"China is getting very worried about its foreign exchange reserves,” Stephen Joske, a former Australian Treasury representative in Beijing, said.
The Chinese government insists its solid foreign reserves are the basis of its economic resilience. The reserves rose in August, and state media at the time heralded it as a sign that China was doing a better job at hedging against financial risks.
China introduced strict capital outflow controls in 2016, enabling it to maintain stability in the amount of money leaving the country despite its trade war with the United States.
Officials from China's State Administration of Foreign Exchange (SAFE) said total foreign currency reserves were up US$19.7 billion, or 0.6 per cent, since the start of 2019, but did not detail month-to-month movements.
"Factors including the global economic growth, monetary policies of major countries, the global trade situation and geopolitics led to the rise in the US dollar index and the drop in bond prices of major countries," SAFE spokesman Wang Chunying was quoted as saying in state media.
He insisted China's foreign exchange reserves were generally stable, with small fluctuations in the scale of reserves affected mainly by valuation.
The ongoing trade spat is casting an ominous shadow over the global economy.  AP
China will release quarterly GDP data in 10 days. Beijing has forecast 6 per cent growth for 2019, although trade tensions with the United States could make this difficult to achieve. Senior US-China trade negotiators are scheduled to meet in Washington this week before the latest round of US tariffs on Chinese goods come into effect.
Capital Economics estimated China sold US$20 to US$25 billion of reserves in August, but the actual size of foreign exchange intervention would not be known until the People's Bank of China (PBOC) publishes its balance sheet later in the month.
“The PBOC has not sold or bought foreign exchange in any meaningful amounts this year and it appears that did not change last month," Julian Evans-Pritchard, Capital Economics senior China economist, said.
"In the statement accompanying the reserve data release, the PBOC said that the change in the headline FX reserves was the result of valuation effects."
He estimated trade tensions would likely flare up again, putting renewed downward pressure on the renminbi.
Iran said this week China’s state oil company withdrew from a US$5 billion deal to develop part of the country’s offshore natural gas field. There have also been reports of some major Belt and Road infrastructure projects being halted before completion which suggests Beijing is taking a more cautious approach to overseas spending.

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