China’s June forex reserves fall more than expected to $3.071 trln

China’s foreign exchange reserves fell more than expected in June, official data showed on Thursday, as the dollar climbed against other major currencies, fuelled by aggressive US interest rate hikes.

The country’s foreign exchange reserves - the world’s largest - fell $56.5 billion to $3.071 trillion last month, compared with $3.113 trillion tipped by a Reuters poll of analysts and $3.128 trillion in May.

For the first half of 2022, China’s foreign exchange reserves fell $178.9 billion, data from the central bank showed, inching towards a closely watched threshold of $3 trillion. Reserves have not fallen below that level since early 2017. The State Administration of Foreign Exchange (SAFE) said in a statement that the 1.8 per cent drop in June reserves mainly reflected valuation effects, as the dollar rose and global asset prices fell sharply amid worries over inflation and the growth outlook.

“At present, global economic growth has slowed, inflation remains high, international financial market volatility has increased, and the external environment has become more complex and severe,” SAFE said. But China’s resilient economic fundamentals and long-term growth potential will help to keep the country’s foreign exchange reserves largely steady, the regulator said.

Ken Cheung, chief Asian FX strategist at Mizuho Bank, said whether forex reserves would fall below $3 trillion would depend on the dollar’s movements.

“It really depends on whether the dollar could strengthen further,” Cheung said, estimating that valuation effects should account for $31.4 billion of the drop in June reserves.

Foreign investors continued to cut holdings in Chinese bonds in June but added positions in equities, bucking the trend in other emerging markets (EM), the Institute of International Finance (IIF) said on Wednesday.

China’s economy has started to show signs of recovery from a sharp COVID-induced slump in spring, but concerns over capital outflow risks are likely to linger as its supportive monetary policy continues to diverge from major central banks in the rest of the world, which are hiking interest rates to tackle inflation.