Summary of Key Points
By the end of May, China's foreign exchange reserves amounted to $3.4422 trillion, an increase of $31.7 billion (0.93%) compared to April. At the same time, gold reserves continued to grow for the third consecutive month, with an additional 320,000 ounces added in May, bringing the total to 74.96 million ounces. The rise in foreign exchange reserves was mainly due to the significant gains in global stock markets, which offset the negative effects of the appreciation of the US dollar and the depreciation of non-US currencies. The increase in gold reserves was aimed at optimizing the reserve structure (the current proportion is far below the global average) and enhancing the credibility of the RMB. It is expected that foreign exchange reserves will remain stable with a slight increase in the future, and the trend of increasing gold reserves will continue.
I. Why Did Foreign Exchange Reserves Rise? – Strong Stock Market Performance Overcame the Negatives of the US Dollar and Bond Markets
Changes in foreign exchange reserves are not simply the result of making profits; they are the outcome of both "valuation changes" and "asset price changes":
- Negative Impact of the US Dollar Appreciation: In May, the US dollar became more valuable (the US dollar index rose by 0.9%). Since China's foreign exchange reserves include non-US currencies such as the euro and yen, their value decreased when converted into dollars, which would have reduced the total reserves.
- Positive Impact of Strong Stock Market Performance: However, global stock markets surged in May due to the AI boom (with significant gains in the US and European markets). The value of China's stock assets in its reserves increased significantly, outweighing the losses from the depreciation of non-US currencies. Although some bond prices fell, the overall impact was minimal, leading to an increase in foreign exchange reserves. Expert Wang Qing stated, "The rise in stock market values offset the decline in US Treasury bond prices and the appreciation of the US dollar, contributing to an increase in the value of China's foreign exchange reserves."
II. Why Are Gold Reserves Continuously Being Increased?
In May, the central bank purchased another 320,000 ounces of gold, continuing the trend for three months. There are two main reasons behind this:
- Unbalanced Reserve Structure: Currently, gold accounts for only 8.8% of China's official international reserves, while the global average is 27%. Increasing gold reserves helps diversify the portfolio and reduce the risk associated with a single currency (such as the US dollar).
- Enhancing the Credibility of the RMB: Gold is recognized worldwide as a "hard currency." Having more gold enhances the credibility of the RMB internationally, which can promote its internationalization (for example, other countries may be more willing to use the RMB for transactions). Even though gold prices are currently at historical highs, experts believe that further purchases are necessary.
III. Can Foreign Exchange Reserves Remain Stable in the Future? – Export and Foreign Investment Provide Stability
Expert Wen Bin believes that foreign exchange reserves can remain stable or even increase in the future, supported by three factors:
- Strong Export Performance: The AI industry is driving external demand (for example, China exports AI-related equipment and chips). Additionally, China's export markets are becoming more diversified (including Southeast Asia and the Middle East), and its advantages in renewable energy manufacturing (such as electric vehicles and photovoltaic products) are contributing to stable exports.
- More Balanced Trade: Imports are also increasing (due to expanding domestic demand and rising prices), preventing an imbalance between exports and imports, which is beneficial for the stability of the balance of payments.
- Stable Foreign Investment: The relaxation of restrictions on services sectors (telecommunications, healthcare, internet) will maintain a steady flow of foreign direct investment (FDI), preventing a large outflow of capital.
IV. How Do Global Market Fluctuations Affect China?
In May, global financial markets showed clear divergence, which directly impacted China's foreign exchange reserves:
- Exchange Rates: The appreciation of the US dollar caused the yen, euro, and pound to decline against the US dollar (for example, the yen fell by 1.7%), reducing the value of non-US currency assets in Chinese reserves.
- Bonds: The yield on US Treasury bonds increased (meaning their prices fell), while yields on Eurozone bonds decreased (meaning their prices rose), but the overall impact on bond assets was limited.
- Stock Markets: The AI boom led to significant gains in major global stock markets, which were a major driving force behind the increase in foreign exchange reserves.
In summary, although the US dollar and some bonds had a negative impact, the strong performance of stock markets ultimately contributed to an increase in China's foreign exchange reserves.
V. Future Trends for Gold and Foreign Exchange Reserves
- Gold: Expert Wang Qing suggests that the current proportion of gold in reserves is too low, and there is still much room for further increases. "The central bank will continue to purchase more gold in the future."
- Foreign Exchange Reserves: China's economy is growing steadily, with support from exports and foreign investment. If global asset prices remain stable, the scale of foreign exchange reserves will likely remain relatively constant.
In conclusion, both the increase in foreign exchange reserves and gold reserves are aimed at maintaining stability—stabilizing the balance of payments, currency credibility, and the overall economic situation. There is no need for concern; these changes are moving in a positive direction.