Higher asset prices trigger record growth in foreign currency holdings

China's foreign exchange reserves rose to a five-year high of $3.2218 trillion in May due to changes in asset prices after the United States dollar depreciated, according to the country's forex regulator.

By the end of May, the country's forex reserves had risen by $23.6 billion, or 0.74 percent, from April, the highest level in more than five years, the State Administration of Foreign Exchange said.

Though foreign exchange reserves are usually denominated in the US dollars, several non-US dollar currencies appreciated against the greenback in May. In addition, the effects of asset price changes meant that foreign exchange reserves went up on a monthly basis, said Wang Chunying, deputy head of the SAFE and spokeswoman.

Global factors such as the speed of release of COVID-19 vaccinations, monetary policy and inflation expectations in major countries, and macroeconomic indicators led to an appreciation of the non-US dollar currencies and increases in financial asset prices of major economies, said Wang.

The US dollar index dropped by nearly 1.6 percent last month, while the pace of yuan appreciation accelerated and hit a three-year high by the end of May due to strong capital inflows and exports.

"The yuan supply-demand relationship in the forex market is still at an equilibrium in general. As such, the yuan appreciation has little influence on the volume of foreign exchange reserves. The key reason for the growth in reserves was the valuation of assets," said Guan Tao, global chief economist of BOC International (China) Co Ltd.

Another reason was falling US Treasury yields, which boosted bond prices. US stocks also edged up, leading to a higher value for the reserved assets, said Guan.

Newly released US data for employment in May may not change the US Federal Reserve's dovish monetary policy stance, while the pickup in consumer inflation may push the US central bankers to start talks on the idea of tapering its massive bond-buying program, said experts.

At the same time, it will also add to uncertainties about the US dollar index in the coming weeks. Gold prices have already pulled back slightly, while the US Dollar Index has ticked up.

Besides the external uncertainties, China's robust trade data and steady capital inflows have supported the stable growth of foreign exchange reserves, said experts. In May, trade surplus hit $45.54 billion, up $2.68 billion from April.

"It is expected that the yuan exchange rate will be at a reasonable level in the next stage, with two-way fluctuations, while forex supply and demand will be balanced," said Wen Bin, chief researcher at China Minsheng Bank, adding that enterprises and financial institutions should pay attention to risk prevention, adapt to the normalized two-way fluctuations and use risk neutral as a basic concept in exchange rate risk management.