China’s currency reserves rose lately- really surprising and good news?

08:00 by Hubert Fromlet, Kalmar

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Kinas lätt stigande valutareserv saknar ekonomisk relevans

Sammanfattning på svenska / Summary in Swedish                                

Kinas i maj lätt stigande valutareserv fick nyligen överdriven uppmärksamhet i en del analyser. Bytesbalansen är viktigare.

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In the middle of June, one could read that China’s currency reserves “surprisingly” had risen from billion USD 3095 billion in April this year to USD 3101 billion one month later – compared to market expectations at 3090 billion.

What caught my attention was not so much this little rise as such but the used description of “surprisingly” – and also the still ongoing publication of market expectations. Hereby, a feeling may be given to readers and appliers of this statistical indicator that forex reserves can be predicted with good accuracy.

However, this is by no means continuously the case. First, USD 5 or 11 billion is a very small amount related to more than 3000 billion of total currency reserves. Second, most central banks easily have the opportunity to influence their forex reserves in the shorter run by so-called forward agreements – an instrument which the Swedish Riksbank applied, for example, quite ambitiously some thirty years ago when the Swedish crown was burdened by both high deficits in public budget deficits and in the current account.

Consequently, the recent limited rise of China’s currency reserves does not necessarily reflect free market developments. Markets are usually neither informed on this issue by a central bank nor on the composition of the currency reserve. More interesting, however, is the fact that China lost close to USD 1000 billion of its currency reserves in the past five years, partly reflecting the strongly shrinking or even more or less eliminated surplus in the current account.

Unfortunately, financial markets still neglect the analysis of China’s current account. This may even turn out to be a malign neglect at some point in the future (see also my article on this issue in: chinaresearch.se from May 15 this year).

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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