Abstract As of November 30, 2016, China’s foreign exchange reserves were US$3.05 trillion, a decrease of US$69.1 billion from the end of October, a decrease of 2.2%. This is the fifth consecutive month of decline in foreign exchange reserves, and the largest decline since January this year. To 2...
As of November 30, 2016, China’s foreign exchange reserves stood at US$3.05 trillion, down by US$69.1 billion from the end of October, a decrease of 2.2%. This is the fifth consecutive month of decline in foreign exchange reserves, and the largest decline since January this year. By the end of the second quarter of 2014, China's foreign exchange reserves reached 3.99 trillion US dollars, approaching the 4 trillion mark, accounting for one-third of the total global foreign reserves, far ahead of other countries. Since then, this strong growth has come to an abrupt end until it is reversed.
At present, the scale of China's foreign exchange reserves has returned to the level of the end of March 2011 more than five years ago. At that time, foreign exchange reserves were in a soaring stage. By November 2016, in less than two years, China’s foreign reserves had fallen by $940 billion. Many people may be curious as to where these foreign exchange reserves have gone.
The relevant person in charge of the foreign exchange bureau said earlier that the factors affecting the scale of changes in foreign exchange reserves mainly include four aspects: the operation of the central bank in the foreign exchange market; the fluctuation of the price of foreign exchange reserve investment assets; because the US dollar is the measurement currency of foreign exchange reserves, the other currencies are relatively Changes in the exchange rate of the US dollar may lead to changes in the size of foreign exchange reserves; according to the definition of foreign exchange reserves of the International Monetary Fund, foreign exchange reserves will be adjusted from the scale of foreign exchange reserves to the scale when the use of funds for supporting “going out†is recorded. vice versa.
Due to changes in the international and domestic economic situation, changes in foreign reserves may have different specific reasons each month. For example, in November this year, the relevant person in charge of the foreign exchange bureau analyzed because the central bank provided foreign exchange funds to the market to adjust the balance of foreign exchange supply and demand. After the US election, the non-US dollar currency depreciated against the US dollar exchange rate and the bond price also showed a correction. The role has led to a decline in the size of foreign exchange reserves.
Using foreign reserves to buy US Treasury bonds has a significant loss
Like some other countries, China never publishes the specific composition of its foreign exchange reserves. The China National Gold Research Department has estimated the currency composition of China's foreign exchange reserves based on central bank statistics. Like some other countries, China never publishes the specific composition of its foreign exchange reserves. The China National Gold Research Department has estimated the currency composition of China's foreign exchange reserves based on central bank statistics.
First, the US dollar has an absolute dominant position in China's foreign exchange reserves, with a share of about 66.7%. China allocates a large portion of its foreign exchange reserves to US Treasury bonds, because this is the only market that can accommodate China's huge investment and is large enough, and the US dollar is the main currency for external payments.
Zhu Haibin, chief economist at JPMorgan China, said that the price of US Treasury bonds fell sharply in November. From the book's perspective, China's use of foreign reserves to purchase long-term US Treasury bonds will be very significant. This is a key factor in the decline in foreign exchange reserves in November. According to the latest data released by the US Treasury in November, China held US$1.16 trillion in US Treasury bonds in September, making it one of the largest foreign holders of US Treasury bonds. However, China has been reducing its holdings of US Treasury bonds for several months.
Second is the euro asset. According to CICC, euro assets account for about 19.6% of China's foreign exchange reserves, which is lower than its share of 20.4% of global foreign exchange reserves. In recent years, although the European debt crisis has not broken, China seems to gradually increase the weight of the euro in foreign exchange reserves. Sterling accounts for about 10.6% of China's foreign exchange reserves, above the global benchmark of 4.8%.
The withdrawal of the British referendum from the European Union has led to a significant depreciation of the euro and the pound. According to the weight of CICC, the exchange rate changes between the euro and the pound have brought about $57.4 billion in book losses to China's foreign exchange reserves.
In addition, the yen is low in China's foreign exchange reserves, accounting for 3.1%, below the global benchmark of 4.1%. From the beginning of the year to July this year, the yen has appreciated by 14.6%, which has brought about $15.1 billion in book income to China's foreign exchange reserves.
Zhao Qingming, chief economist at China Financial Futures Exchange Research Institute, believes that China has about $1 trillion in non-US dollar assets. According to the depreciation of 3% of all non-US currencies, it has caused almost $30 billion in book losses.
Therefore, from the perspective of currency composition, the current reduction of China's foreign exchange reserves is not necessarily the real reduction of foreign exchange assets. The foreign exchange reserve assets denominated in other currencies are depreciated by the exchange rate against the US dollar, and finally the assets are devalued after being converted into US dollars. Since US dollar assets account for the majority, the changes in the price of these dollar-denominated securities are also important reasons for China's foreign reserves.
The accumulation of foreign exchange caused by the collection of foreign exchange
Since the beginning of this year, the exchange rate of the RMB against the US dollar has fallen by more than 6%. Due to the obvious appreciation of the US dollar, many domestic enterprises and individuals choose to hold foreign exchange assets. This kind of “storage in the people†also consumes a large amount of foreign exchange reserves.
According to the latest data from the central bank, China’s bank settlement and sales deficit in November was 33.4 billion U.S. dollars, more than doubled from the previous month’s deficit of 14.6 billion U.S. dollars, and it was the 17th consecutive month of deficit. Analysts pointed out that the continued strengthening of the US dollar in November and the rapid depreciation of the renminbi have led to a stronger willingness to purchase foreign exchange, which is the main reason for the expansion of the deficit in settlement and sale.
In August last year, the relevant person in charge of the central bank explained the reason for the decline in foreign reserves in the month, saying that whether the central bank operates in the foreign exchange market, it provides foreign exchange liquidity to the market; or the foreign exchange reserve entrusted loan project carried out some fund withdrawals in August. It is largely reflected in the increase in foreign exchange assets held by other entities in the country, which means that the assets allocation of enterprises, residents and financial institutions is more abundant. This is the embodiment of China’s strategy of “collecting foreign exchange in the people†and is conducive to promotion. Balance of Payments.
How much is foreign exchange reserve suitable?
It is worth noting that when the foreign reserve approached the $4 trillion mark in 2014, everyone discussed "What should I do if there are too many external reserves?" And the official voice also believes that the foreign exchange reserves are not as good as possible.
Wan Hao, chief economist of China National Gold Group, said that global reserves began to decline in August 2014, which is basically consistent with China's time. In the process of the two-year correction, the scale of foreign exchange reserves is actually in line with the changes in the economic structure of the country, so it is a relatively normal thing. Wan Hao believes that from the perspective of balance of payments and debt coverage, a conservative estimate of about $2 trillion should be a relatively adequate level.
Zong Liang, chief researcher of the Bank of China, pointed out that China’s foreign exchange reserves in 1993 were only 21.2 billion US dollars, and later reached 4 trillion, and now there are still 3 trillion. From a vertical perspective, the size of China's foreign reserves is still quite large. From a horizontal perspective, there are no more foreign exchange reserves in other countries in the world. Even if the current total is halved, only $1.5 trillion is left, more than in other countries. "The waist is not in a hurry, now it is even less urgent."
However, the famous economist Li Daokui believes that if the foreign reserve falls below 3 trillion US dollars, there will be greater risks. Because this will further pressure the renminbi exchange rate, enter a vicious circle, and form a self-fulfilling devaluation expectation. Many traders and investors in the foreign exchange market are actually unable to understand the fundamentals of the economy and finance, mainly looking at some macro foreign exchange data, so the situation is rather grim.
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