(Original title: Why did the foreign exchange reserves “stably hold” the $3 trillion mark in June when the strong dollar hit)
Affected by the sharply unexpected 75 basis points increase in interest rates by the Federal Reserve in June, which triggered violent fluctuations in the global financial market, China’s foreign exchange reserves fell slightly, but remained above the $3 trillion integer mark.
On July 7, the State Administration of Foreign Exchange released the latest data showing that as of the end of June 2022, the balance of China’s foreign exchange reserves was US$3,071.272 billion, a decrease of US$56.508 billion from the end of May.
Wang Chunying, deputy director of the State Administration of Foreign Exchange, said that in the international financial market, affected by major countries’ monetary policies, inflation expectations, global economic growth prospects and other factors, the US dollar index rose significantly, and the prices of financial assets in major countries fell sharply. As China’s foreign exchange reserves are denominated in US dollars, the amount of non-US dollars converted into US dollars has decreased, as well as changes in asset prices and other factors, the scale of foreign exchange reserves declined in June.
A large Wall Street macroeconomic hedge fund manager told reporters that China’s foreign exchange reserves fell month-on-month in June, which was also expected by the market. Because as long as the U.S. dollar index rises sharply, the amount of non-U.S. assets converted into U.S. dollars decreases, and the foreign exchange reserves (in U.S. dollars) of many countries will likely fall back.
“Not only China, but other emerging market countries’ foreign exchange reserves have declined to varying degrees due to the reduction in the amount of non-U.S. assets converted into U.S. dollars.” He pointed out.
Communication data Datayes shows that the US dollar index rose by 2.89% in June, resulting in a 5.48% drop in the exchange rate of the Japanese yen once morest the US dollar, a 2.32% drop in the euro once morest the US dollar, and a 3.36% drop in the pound once morest the US dollar. The amount was significantly reduced. In addition, in June, the Federal Reserve raised interest rates by 75 basis points and other factors, which caused the US Dow Jones index to fall by 6.71%, and the British FTSE 100 stock index to fall by 5.75%, which further dragged down the scale of foreign exchange reserves.
Zhao Qingming, vice president of the China Foreign Exchange Investment Research Institute, believes that due to the significant exchange rate of non-US currency exchange rates, only the exchange rate fluctuations in June caused China’s foreign exchange reserves to adjust by more than 30 billion US dollars. It will also drag down China’s foreign exchange reserves in the month.
It is worth noting that, in the face of the Federal Reserve’s unexpectedly sharp increase of 75 basis points in interest rates in June and the continued strength of the US dollar index, the foreign exchange reserves of China’s balance of payments did not fluctuate significantly that month, indicating that China’s foreign exchange market is generally operating smoothly, and domestic foreign exchange reserves are generally stable. Foreign exchange supply and demand remained basically balanced.
“For now, the cross-border flow of current and financial funds in China’s balance of payments will continue the mirror relationship of one out and one in, so that China’s cross-border capital flow remains balanced and stable.” A domestic private equity fund macro Economists pointed out.
The reporter noticed that although the market expects that China’s foreign exchange reserves may be corrected in June, the actual volatility of the RMB and the implied volatility of options have both declined in that month, indicating that the RMB exchange rate fluctuations in the foreign exchange market are expected to be quite stable.
After the release of the foreign exchange reserve data in June, the fluctuation of the RMB exchange rate also remained stable. As of 18:00 on July 7, in the face of the US dollar index hitting a new high of 107.26 in the past 20 years, the exchange rate of RMB once morest the US dollar in the domestic onshore market hovered around 6.7015, a slight rebound of 55 basis points from the previous trading day.
Behind this, many overseas investment institutions believe that the current fluctuations in China’s foreign exchange reserves mainly reflect changes in their asset valuations, and have no obvious positive correlation with cross-border capital outflows. They are more willing to pay attention to the recovery of China’s foreign trade prosperity and the continuous opening of the financial market since May, as the main basis for judging the future valuation of the RMB’s equilibrium exchange rate.
Wang Chunying said that the current global economic growth is slowing down, inflation remains high, the volatility of the international financial market has increased, and the external environment has become more complex and severe. However, my country adheres to the efficient coordination of epidemic prevention and control and economic and social development. The fundamentals of strong economic resilience, sufficient potential and long-term improvement have not changed, which is conducive to the overall stability of the scale of foreign exchange reserves.
“Strong U.S. Dollar” Triggers Valuations of Non-U.S. Currency Assets to Fall
The reporter learned that the financial market has long anticipated the decline in the scale of foreign exchange reserves in June.
The reason is that in June, the Federal Reserve raised interest rates by 75 basis points unexpectedly, which made the 10-year U.S. bond yield hit a high of 3.498% during the year (resulting in a relatively large drop in U.S. bond prices), which caused the holding of more than one trillion U.S. dollars of U.S. Treasury bonds. China’s foreign exchange reserves will inevitably encounter a certain degree of valuation correction.
“Although the 10-year U.S. bond yield fell to around 3% in late June (U.S. bond prices rebounded), some hedge funds still expect China’s foreign exchange reserves to suffer a valuation correction of regarding US$10 billion in June due to the fall in U.S. bond prices. .” The aforementioned Wall Street large macroeconomic hedge fund manager pointed out.
Some Wall Street hedge fund managers retorted that, in view of the falling pressure of US bond prices brought regarding by the Fed’s continued sharp interest rate hikes, foreign exchange reserve management departments of many countries have already hedged and hedged their US bond positions, leaving only extremely A small number of risk exposures, so the impact of the decline in US bond prices in June on the fluctuations in the size of these countries’ foreign exchange reserves is quite limited.
According to a director of the asset allocation department of a large Wall Street asset management institution, another important driver of the fall in China’s foreign exchange reserves in June was the sharp rise in the dollar, which led to a significant drop in the valuation of non-US assets converted to US dollars. In particular, the U.S. dollar index rose by 2.89% in June, causing the exchange rates of the Japanese yen, the euro and the British pound to drop by 5.48%, 2.32% and 3.36% respectively once morest the dollar.
“Especially when the Fed is raising interest rates faster than other countries and the rate of interest rate hikes is higher than other countries, the financial market is paying close attention to whether the exchange rate of non-US currencies will fall further, dragging down the scale of foreign exchange reserves of various countries to continue to pull back.” He pointed out .
A chief representative of the Asia-Pacific region of a large European asset management institution entrusted with the management of foreign exchange reserves in many countries revealed to reporters that considering that the Federal Reserve may continue to raise interest rates by 75 basis points, the global financial market prices will fluctuate violently. It is reducing its holdings of risk assets such as stocks in European and American countries, and turning to cross-cycle PE/infrastructure alternative assets, as well as institutional corporate bonds that take into account high yields and higher credit ratings. It is foreseeable that even if the Fed continues to raise interest rates sharply by 75 basis points to increase the volatility of the global financial market, it may not necessarily constitute a sustained and significant impact on the stable fluctuation of the foreign exchange reserves of various countries.
It will not hinder the balanced and stable cross-border flow of Chinese capital
It is worth noting that the fall in China’s foreign exchange reserves in June did not hinder the continuation of the balanced and stable trend of China’s cross-border capital flows.
A foreign exchange trader from a foreign bank revealed to reporters that although the U.S. dollar index rose by 2.89% in June following the U.S. Federal Reserve raised interest rates by 75 basis points unexpectedly, the exchange rate of the RMB once morest the U.S. dollar rose slightly by 0.21% in the month, and the pressure on capital outflows faced by China was suddenly reduced.
He pointed out that both the actual volatility of the RMB and the implied volatility of options are falling steadily, indicating that the foreign exchange market’s expectations for the volatility of the RMB have stabilized, which invisibly promotes the overall stable operation of China’s foreign exchange market. In addition, with the resumption of work in China With the resumption of production and the recovery of economic vitality, more and more overseas capital has returned to the Chinese stock and bond market, which not only makes short selling of overseas speculative capital more difficult, but also helps the cross-border flow of Chinese capital to be more balanced and stable.
Communication data Datayes shows that the net inflow of northbound funds in June reached regarding 72.69 billion yuan, the third largest monthly inflow since the launch of the mainland-stock connect. In addition, the resumption of work and production has made the foreign trade boom continue to rebound, which is enough to respond to the Federal Reserve’s sharp interest rate hike. , capital outflow pressure caused by factors such as additional investment of southbound funds.
The above-mentioned domestic private economic macroeconomists revealed to reporters that as the RMB exchange rate stabilizes and rebounds, the market generally expects that the reduction of overseas capital’s holdings of domestic RMB bonds in June will be much lower than that of the previous four months, even if the southbound funds are heavily netted in that month. The outflow amounted to HK$53.388 billion, setting a new record in the past 16 months. However, the increase in the foreign trade surplus brought regarding by the recovery of the foreign trade boom, as well as the substantial inflow of northbound capital and the steady increase in FDI investment by overseas companies, are sufficient to ensure the continuation of the cross-border flow of Chinese capital. Balanced balance.
In his view, despite the fall in foreign exchange reserves in June, its influence on fluctuations in the yuan’s exchange rate has been diminishing. The reason is that, first, more and more overseas investment institutions believe that changes in the scale of China’s foreign exchange reserves mainly reflect changes in their asset valuations, and there is no obvious positive correlation with China’s cross-border capital outflows; second, China still has a large number of monetary and fiscal assets. Policy tools promote the steady growth of economic fundamentals, so that the RMB exchange rate will still receive high support; thirdly, under the circumstance that the Federal Reserve continues to raise interest rates sharply and triggers increasingly volatile financial markets, the safe-haven effect of Chinese assets will still attract a large number of overseas capital Continue to increase positions in various RMB assets to help the RMB exchange rate fluctuate smoothly in both directions within the equilibrium exchange rate range.
