China says diversifying forex reserves

Currency regulator dismisses reports on slowing US treasury purchases

China is diversifying its foreign exchange reserves in order to safeguard their value, the State Administration of Foreign Exchange, the country's currency regulator, said on Thursday, dismissing media reports that it was halting or reducing its purchases of United States debt.

The country's foreign exchange reserves are expected to remain balanced and stable this year, given the prospects of sound economic growth and the further opening-up of the financial sector, it said.

The expected stable reserves will also be supported by improved market expectations and the sustainable recovery of global economy, which in turn will boost external demand.

In a statement on its website, the forex regulator denied earlier media reports that the government is reducing or suspending the purchases of US Treasury bonds. "The report might have been attributed to the wrong source or could be fake news," it said.

By the end of December 2017, the country's total foreign exchange reserves had reached $3.14 trillion, up by 0.66 percent or $20.7 billion compared with the level in November 2017. It also marked the 11th straight month of increase, according to data from the regulator.

"Slight fluctuation in the global financial markets, along with the rises of non-US dollar currencies' exchange rates and asset prices in December drove the growth of the foreign exchange reserves," it said.

In 2017, the country's foreign exchange reserves had dropped to 2.998 trillion by the end of January, after which it rebounded by 4.3 percent or $129.4 billion during the whole year, showed the official data.

As the overall economic situation remained stable last year, cross-border capital flows showed a more stable and balanced trend. "The steady balance of payments has secured consecutive growth of foreign exchange reserves," the regulator said.

"The global weakness of the US dollar, combined with a clampdown on financial outflows, eased the pressure on foreign exchange reserves in 2017," said Louis Kuijs, head of Asia Economics with Oxford Economics.

"In our baseline analysis, with the US dollar not regaining ground and monetary policy normalization in the US and Europe proceeding at a gradual and mild pace, we expect the yuan to appreciate slightly against the US dollar in 2018, ending the year at 6.48," he said.

Kuijs expected the policy stance on outflows to be relaxed only gradually, given that net financial outflows remain sizable.

"If depreciation pressure on the foreign exchange market were to re-emerge we would expect a stronger clampdown on outflows rather than significant currency depreciation," he added.

Liang Hong, chief economist with China International Capital Corp, said that with the fundamentals of the Chinese economy improving and investment returns increasing, the yuan could strengthen further this year.