China’s Forex Reserves Shrink as U.S. Dollar Gains and Markets Slide

What’s new: China’s foreign exchange reserves fell by $56.5 billion to $3.071 trillion in June, the lowest since March 2020, official data showed Thursday.

In the first half of the year, the country’s forex holdings shrank by $178.9 billion, according to the State Administration of Foreign Exchange (SAFE).

Why: SAFE attributed the June drop to the increasing strength of the dollar and drops in major financial markets.

The U.S. Dollar Index, which tracks the greenback’s value against six other currencies, has risen quickly following the Federal Reserve’s aggressive interest rate hikes earlier this year. The index is up nearly 12% year-to-date, hitting a two-decade high of around 107.5 this week.

The stronger dollar meant that the value of China’s forex reserves denominated in non-dollar currencies declined in dollar terms, SAFE spokesperson Wang Chunying said in a statement on Thursday.

Meanwhile, financial asset prices in major countries slumped, also contributing to the decline in China’s forex reserves, Wang said.

The outlook: The $3 trillion threshold is closely watched, as China’s forex reserves have not fallen below that level since January 2017. But economists pointed out that the recent drop is no cause for worry.

“The impact of the periodic decline in the balance of China’s forex reserves is limited,” Guan Tao, an analyst at BOC International (China) Co. Ltd., wrote in a May research note. “It doesn’t necessarily mean that there has been intervention by the central bank, capital outflow or losses from operations of the reserves.”

China’s strong economic resilience and growth potential will help support the stability of its forex reserves despite slowing global economic growth and increasing volatility in global financial markets, Wang said.

Quick Takes are condensed versions of China-related stories for fast news you can use. To read the full story in Chinese, click here.

Contact reporter Kelsey Cheng (kelseycheng@caixin.com) and editor Jonathan Breen (jonathanbreen@caixin.com)

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